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ACCO 220 midterm Solutions to practice questions Financial and Managerial Accounting (Concordia University) $12.49   Add to cart
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ACCO 220 midterm Solutions to practice questions Financial and Managerial Accounting (Concordia University)
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ACCO 220 midterm Solutions to practice questions Financial and Managerial Accounting (Concordia University)

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  • February 16, 2024
  • 8
  • 2023/2024
  • Exam (elaborations)
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  • acco 220 midterm solutions to practice questions

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ACCO 220 midterm Solutions to practice
questions Financial and Managerial
Accounting (Concordia University)

, lOMoARcPSD|10754654




SOLUTIONS

Practice questions Multiple Choice
1. XYZ has $25,000 of debt outstanding and a book value of equity of $25,000. The company has
10,000 shares outstanding and a stock price of $10. If the unlevered beta is 0.75 and the marginal
tax rate is 20%, what is XYZ's levered beta?

a. 0.75
b. 0.8
c. 0.85
D. 0.9

Market value of equity = 10,000 x $10 = $100,000; β L = 0.75[1+(1-0.2)($25,000/$100,000)]


2. The Collection Co. has a current beta of 1.6. The market risk premium is 7 percent and the risk-
free rate of return is 3 percent. By how much will the cost of equity increase if the company
expands their operations such that their company beta rises to 1.9?
a. 0.30 percent
b. 0.90 percent
c. 1.50 percent
D. 2.10 percent
e. 2.70 percent

Current cost of equity = 3+1.6(7) = 14.2% New cost of equity = 3+1.9(7) = 16.3% Change in cost of equity =
16.3 – 14.2 = 2.1

3. Blue Ribbon, Inc. wants to have a weighted average cost of capital of 10 percent. The firm has an
aftertax cost of debt of 4 percent and a cost of equity of 12 percent. What debt-equity ratio is
needed for the firm to achieve their targeted weighted average cost of capital?
a. .25
B. .33
c. .50
d. .67
e. .75

.10 = [We .12] + [(1 We) .04)
.10 = .12We + .04 .04We
.06 = .08We
We =.75
Wd = 1 We = 1 .75 = .25
Debt-equity ratio = .25 / .75 = .33


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