Nabila Sedki 51800015

Corporate finance Midterm exam

Multiple choice questions (75 points)

1:B
2: D
3:A
4:E
5:C
6:E
7:B
8:C
9:C
10:B
11:C
12:C
13:B
14:A
15:A
16:A
17:A
18:D
19:D
20:D
21:D
22:E
23:C
24:A
25:D
26:A
27:C
28:C
29 :C
30 :B

Problem 25points
-AnswerA
Ans b:

We (Weight of equity) = $48.5 million / $58.5 million

Wd ((Weight of debt) = $10 million / $58.5 million

Kd (cost of equity) = 7%

Ke (cost of equity) =?
Tax rate = 35%

WACC of company A = 10.5%

The WACC of the company is given by formula:

WACC = (ke x We) + (Kd x (1 - tax rate) x Wd)

On putting the known values in the above formula, we get:

0.105 = Ke x (48.5 / 58.5) + (0.07 x (1 - 0.35) x (10 / 58.5)

0.105 = Ke x (0.829) + (0.046 x 0.171)

0.105 = Ke x (0.829) + 0.007866

Ke = (0.105 - 0.007866) / (0.829)

Thus

Ke (cost of equity) = 0.117 or 11.71%

Ans c:

First of all to compute the unlevered cost of equity capital we need the information of beta
of the stock since that is not provided it means the unlevered cost of equity capital can’t
be computed

Answer d

Assuming the A company is not under any financial distress (assuming zero distress)
then it should opt for debt option and raise $5 million for the project as the (Kd) cost of
debt capital is less than the (Ke) cost of equity capital

but, if a company's financial distress is not zero, it must choose the equity option and
raise funds through it, as issuing debt capital is an obligation for any firm, and they must
pay interest and repay it, but in the case of financial distress, these debt payments
(obligations) can put the company in danger of defaulting on these obligations.
Question2

Yes, the firm should take this project