Question 1

The cost of capital is used to decide whether a proposed corporate investment will increase or decrease the firm's stock price.

Accepted Answer

A) True 
 B)False  True

Question 2

The cost of each type of capital depends on the

Accepted Answer

A)  financial risk of the firm. 
B)  risk-free cost of that type of funds. 
C)  business risk of the firm. 
D)  all of the above. 
A)  financial risk of the firm. 
B)  risk-free cost of that type of funds. 
C)  business risk of the firm. 
D)  all of the above. D

Question 3

A firm's investment opportunities schedule is a ranking of investment possibilities from best(highest return) to worst (lowest return).

Accepted Answer

A) True 
 B)False  True

Question 4

As a source of financing, once retained earnings have been exhausted, the weighted average cost of capital will

Accepted Answer

A)  remain the same. 
B)  change in an undetermined direction. 
C)  decrease. 
D)  increase. 
A)  remain the same. 
B)  change in an undetermined direction. 
C)  decrease. 
D)  increase.

Question 5

The __________is a schedule or graph relating the firm's weighted average cost of capital to the level of new financing.

Accepted Answer

A)  breaking point 
B)  weighted marginal cost of capital 
C)  weighted average cost of capital 
D)  target capital structure 
A)  breaking point 
B)  weighted marginal cost of capital 
C)  weighted average cost of capital 
D)  target capital structure

Question 6

The __________is the rate of return a firm must earn on its investments in projects in order tomaintain the market value of its stock.

Accepted Answer

A)  internal rate of return 
B)  gross profit margin 
C)  net present value 
D)  cost of capital 
A)  internal rate of return 
B)  gross profit margin 
C)  net present value 
D)  cost of capital

Question 7

The cost of preferred stock is typically higher than the cost of long-term debt (bonds) because the cost of long-term debt (interest) is tax deductible.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following companies would have the greatest business risk?

Accepted Answer

A)  Manitoba Telephone System 
B)  Royal Bank of Canada 
C)  Canada Safeway 
D)  Air Canada 
A)  Manitoba Telephone System 
B)  Royal Bank of Canada 
C)  Canada Safeway 
D)  Air Canada

Question 9

The cost of retained earnings is always lower than the cost of a new issue of common stock due to the absence of flotation costs when financing projects with retained earnings.

Accepted Answer

A) True 
 B)False

Question 10

Since the net proceeds from sale of new common stock will be less than the current market price, the cost of new issues will always be less than the cost of existing issues.

Accepted Answer

A) True 
 B)False

Question 11

A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.
$$\begin{array} { l c } 
\text { Source of capital } & \begin{array} { c } 
\text { Target market } \
\text { proportions }
\end{array} \
\text { Long-term debt } & 20 \% \
\text { Preferred stock } & 10 \
\text { Common stock equity } & 70
\end{array}$$
DEBT:  The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of 2 percent of the face value would be required in addition to the discount of $40.
PREFERRED STOCK:  The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a
$10 annual dividend. The cost of issuing and selling the stock is $3 per share.
COMMON STOCK:   A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the
end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in
floatation costs. Additionally, the firm's marginal tax rate is 40 percent.

-The firm's aftertax cost of debt is

Accepted Answer

A)  8.13 percent. 
B)  4.5 percent. 
C)  8 percent. 
D)  3.25 percent. 
A)  8.13 percent. 
B)  4.5 percent. 
C)  8 percent. 
D)  3.25 percent.

Question 12

What is your portfolio beta if 50% of your money is invested in the market portfolio and the remainder is invested in a risk-free asset?

Accepted Answer

A)  0.25 
B)  0.75 
C)  1.00 
D)  0.50 
A)  0.25 
B)  0.75 
C)  1.00 
D)  0.50

Question 13

In comparing the constant growth model and the capital asset pricing model (CAPM) to calculatethe cost of common stock equity,

Accepted Answer

A)  the CAPM directly considers risk as reflected in the beta, while the constant growth model uses dividend expectations as a reflection of risk. 
B)  the CAPM directly considers risk as reflected in the beta, while the constant growth model uses the market price as a reflection of the expected risk-return preference of investors. 
C)  the CAPM indirectly considers risk as reflected in the market return, while the constant growth model uses dividend expectations as a reflection of risk. 
D)  the constant growth model ignores risk, while the CAPM directly considers risk as reflected in the beta. 
A)  the CAPM directly considers risk as reflected in the beta, while the constant growth model uses dividend expectations as a reflection of risk. 
B)  the CAPM directly considers risk as reflected in the beta, while the constant growth model uses the market price as a reflection of the expected risk-return preference of investors. 
C)  the CAPM indirectly considers risk as reflected in the market return, while the constant growth model uses dividend expectations as a reflection of risk. 
D)  the constant growth model ignores risk, while the CAPM directly considers risk as reflected in the beta.

Question 14

The four basic sources of long-term funds for the business firm are

Accepted Answer

A)  long-term debt, common stock, preferred stock, and retained earnings. 
B)  current liabilities, long-term debt, common stock, and preferred stock. 
C)  current liabilities, long-term debt, common stock, and retained earnings. 
D)  long-term debt, paid-in capital in excess of par, common stock, and retained earnings. 
A)  long-term debt, common stock, preferred stock, and retained earnings. 
B)  current liabilities, long-term debt, common stock, and preferred stock. 
C)  current liabilities, long-term debt, common stock, and retained earnings. 
D)  long-term debt, paid-in capital in excess of par, common stock, and retained earnings.

Question 15

Using the capital asset pricing model, the cost of common stock equity is the return required byinvestors as compensation for

Accepted Answer

A)  the firm's nondiversifiable risk. 
B)  the specific risk of the firm. 
C)  the firm's diversifiable risk. 
D)  price volatility of the stock. 
A)  the firm's nondiversifiable risk. 
B)  the specific risk of the firm. 
C)  the firm's diversifiable risk. 
D)  price volatility of the stock.

Question 16

A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.
$$\begin{array} { l c } 
\text { Source of capital } & \begin{array} { c } 
\text { Target market } \
\text { proportions }
\end{array} \
\hline \text { Long-term debt } & 20 \% \
\text { Preferred stock } & 10 \
\text { Common stock equity } & 70
\end{array}$$DEBT:  The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of 2 percent of the face value would be required in addition to the discount of $40.
PREFERRED STOCK:  The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a
$10 annual dividend. The cost of issuing and selling the stock is $3 per share.
COMMON STOCK:   A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the
end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in
floatation costs. Additionally, the firm's marginal tax rate is 40 percent.

-The firm's cost of a new issue of common stock is

Accepted Answer

A)  14.4 percent. 
B)  7 percent. 
C)  9.08 percent. 
D)  13.2 percent. 
A)  14.4 percent. 
B)  7 percent. 
C)  9.08 percent. 
D)  13.2 percent.

Question 17

Since preferred stock is a form of ownership, the stock will never mature.

Accepted Answer

A) True 
 B)False

Question 18

The cost of capital acts as a major link between the firm's long-term investment decisions and the wealth of the owners as determined by investors in the marketplace.

Accepted Answer

A) True 
 B)False

Question 19

The investment opportunity schedule (IOS) is the graph that relates the firm's weighted average cost of capital (WACC) to the level of total new financing.

Accepted Answer

A) True 
 B)False

Question 20

In which country would IBM attach the highest business risk premium?

Accepted Answer

A)  Iran 
B)  Japan 
C)  Canada 
D)  U.S.A. 
A)  Iran 
B)  Japan 
C)  Canada 
D)  U.S.A.

The cost of capital is used to decide whether a proposed corporate investment will increase or decrease the firm's stock price.

The cost of each type of capital depends on the

A firm's investment opportunities schedule is a ranking of investment possibilities from best(highest return) to worst (lowest return).

As a source of financing, once retained earnings have been exhausted, the weighted average cost of capital will

The __________is a schedule or graph relating the firm's weighted average cost of capital to the level of new financing.

The __________is the rate of return a firm must earn on its investments in projects in order tomaintain the market value of its stock.

The cost of preferred stock is typically higher than the cost of long-term debt (bonds) because the cost of long-term debt (interest) is tax deductible.

Which of the following companies would have the greatest business risk?

The cost of retained earnings is always lower than the cost of a new issue of common stock due to the absence of flotation costs when financing projects with retained earnings.

Since the net proceeds from sale of new common stock will be less than the current market price, the cost of new issues will always be less than the cost of existing issues.

What is your portfolio beta if 50% of your money is invested in the market portfolio and the remainder is invested in a risk-free asset?

In comparing the constant growth model and the capital asset pricing model (CAPM) to calculatethe cost of common stock equity,

The four basic sources of long-term funds for the business firm are

Using the capital asset pricing model, the cost of common stock equity is the return required byinvestors as compensation for

Since preferred stock is a form of ownership, the stock will never mature.

The cost of capital acts as a major link between the firm's long-term investment decisions and the wealth of the owners as determined by investors in the marketplace.

The investment opportunity schedule (IOS) is the graph that relates the firm's weighted average cost of capital (WACC) to the level of total new financing.

In which country would IBM attach the highest business risk premium?

Overview of Corporate Finance

Financial Statements, Cash Flows, and Taxes

Financial Statement Analysis

Financial Planning and Forecasting

Financial Markets, Institutions, and Securities

Time Value of Money

Risk and Return

Valuation of Financial Securities

Leverage and Capital Structure

Dividend Policy

Capital Budgeting: Principles and Techniques

Dealing With Project Risk and Other Topics in Capital Budgeting

Working Capital and Management of Current Assets

Management of Current Liabilities

Lease Financing: Concepts and Techniques

Corporate Securities, Derivatives, and Swaps

Mergers and Acquisitions, and Business Failure

International Corporate Finance

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Exam 9: The Cost of Capital

The cost of capital is used to decide whether a proposed corporate investment will increase or decrease the firm's stock price.

The cost of each type of capital depends on the

A firm's investment opportunities schedule is a ranking of investment possibilities from best(highest return) to worst (lowest return).

As a source of financing, once retained earnings have been exhausted, the weighted average cost of capital will

The __________is a schedule or graph relating the firm's weighted average cost of capital to the level of new financing.

The __________is the rate of return a firm must earn on its investments in projects in order tomaintain the market value of its stock.

The cost of preferred stock is typically higher than the cost of long-term debt (bonds) because the cost of long-term debt (interest) is tax deductible.

Which of the following companies would have the greatest business risk?

The cost of retained earnings is always lower than the cost of a new issue of common stock due to the absence of flotation costs when financing projects with retained earnings.

Since the net proceeds from sale of new common stock will be less than the current market price, the cost of new issues will always be less than the cost of existing issues.

What is your portfolio beta if 50% of your money is invested in the market portfolio and the remainder is invested in a risk-free asset?

In comparing the constant growth model and the capital asset pricing model (CAPM) to calculatethe cost of common stock equity,

The four basic sources of long-term funds for the business firm are

Using the capital asset pricing model, the cost of common stock equity is the return required byinvestors as compensation for

Since preferred stock is a form of ownership, the stock will never mature.

The cost of capital acts as a major link between the firm's long-term investment decisions and the wealth of the owners as determined by investors in the marketplace.

The investment opportunity schedule (IOS) is the graph that relates the firm's weighted average cost of capital (WACC) to the level of total new financing.

In which country would IBM attach the highest business risk premium?

Overview of Corporate Finance

Financial Statements, Cash Flows, and Taxes

Financial Statement Analysis

Financial Planning and Forecasting

Financial Markets, Institutions, and Securities

Time Value of Money

Risk and Return

Valuation of Financial Securities

Leverage and Capital Structure

Dividend Policy

Capital Budgeting: Principles and Techniques

Dealing With Project Risk and Other Topics in Capital Budgeting

Working Capital and Management of Current Assets

Management of Current Liabilities

Lease Financing: Concepts and Techniques

Corporate Securities, Derivatives, and Swaps

Mergers and Acquisitions, and Business Failure

International Corporate Finance

Filters