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6. GCC Corporation is planning to issue options to its key employees, and it is now discussing the terms to?


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Old 07-24-2009, 11:18 AM
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Default 6. GCC Corporation is planning to issue options to its key employees, and it is now discussing the terms to?

6. GCC Corporation is planning to issue options to its key employees, and it is now discussing the terms to be set on those options. Which of the following actions would decrease the value of the options, other things held constant?a.GCC's stock price suddenly increases.b.The exercise price of the option is increased.c.The life of the option is increased, i.e., the time until it expires is lengthened.d.The Federal Reserve takes actions that increase the risk-free rate.e.GCC's stock price becomes more risky (higher variance).9. Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and thea.Strike price.b.Variability of the stock price.c.Option's time to maturity.d.All of the above.e.None of the above.10. Roxie Epoxy's balance sheet shows a total of $50 million long-term debt with a coupon rate of 8.00% and a yield to maturity of 7.00%. This debt currently has a market value of $55 million. The balance sheet also shows that that the company has 20 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $8.25 per share; stockholders' required return, rs, is 10.00%; and the firm's tax rate is 40%. Based on market value weights, and assuming the firm is currently at its target capital structure, what WACC should Roxie use to evaluate capital budgeting projects?a.7.26%b.7.56%c.7.88%d.8.21%e.8.55%12. Crary Consolidated has 2 divisions of equal size: a computer division and a restaurant division. Its CFO believes that stand-alone restaurant companies typically have a WACC of 8%, while stand-alone computer companies typically have a 12% WACC. He also believes that Crary's restaurant and computer divisions have the same risk as their typical peers. Consequently, Crary estimates that its composite, or corporate, WACC is 10%. A consultant has suggested using an 8% hurdle rate for the restaurant division and a 12% hurdle rate for the computer division. However, Crary's CFO disagrees, and he has assigned a 10% WACC to all projects in both divisions. Which of the following statements is CORRECT?a.While Crary's decision not to use risk-adjusted WACCs will result in its accepting more projects in the computer division and fewer projects in its restaurant division than if it followed the consultant's recommendation, this should not affect the firm's intrinsic value.b.Crary's decision not to adjust for risk means, in effect, that it is favoring the restaurant division. Therefore, that division is likely to become a larger part of the consolidated company over time.c.Crary's decision not to adjust for risk means that the company will accept too many projects in the computer business and too few projects in the restaurant business. This will lead to a reduction in the firm's intrinsic value over time.d.Crary's decision to not risk adjust means that the company will accept too many projects in the restaurant business and too few projects in the computer business. This will lead to a reduction in its intrinsic value over time.e.Crary's decision not to risk adjust means that the company will accept too many projects in the computer business and too few projects in the restaurant business. This may affect the firm's capital structure but it will not affect its intrinsic value. 13. You were hired as a consultant to Quigley Company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of retained earnings is 12.25%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley's WACC?a.8.29%b.8.62%c.8.96%d.9.32%e.9.69%
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Old 06-21-2017, 04:42 PM
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Old 06-29-2017, 10:56 PM
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Old 01-01-2018, 11:04 PM
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