Question 1

A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals6 percent. The estimated cost of common stock equity is

Accepted Answer

A)  15.6 percent. 
B)  7.2 percent. 
C)  14 percent. 
D)  6 percent. 
A)  15.6 percent. 
B)  7.2 percent. 
C)  14 percent. 
D)  6 percent.

Question 2

An investor has expectations of a $4 dividend next year with future dividends growing at 6% in perpetuity. If the investor is willing to pay $80 for the stock, the investor's expected return is 11%.

Accepted Answer

A) True 
 B)False

Question 3

The firm's beforetax cost of debt is

Accepted Answer

A)  12.7 percent. 
B)  11.2 percent. 
C)  10.6 percent. 
D)  7.4 percent. 
A)  12.7 percent. 
B)  11.2 percent. 
C)  10.6 percent. 
D)  7.4 percent.

Question 4

The specific cost of each source of financing is the after-tax cost of obtaining the financing using the historically based cost reflected by the existing financing on the firm's books.

Accepted Answer

A) True 
 B)False

Question 5

As the volume of financing increases, the costs of the various types of financing will __________,the firm's weighted average cost of capital.

Accepted Answer

A)  decrease, lowering 
B)  increase, lowering 
C)  decrease, raising 
D)  increase, raising 
A)  decrease, lowering 
B)  increase, lowering 
C)  decrease, raising 
D)  increase, raising

Question 6

The capital asset pricing model describes the relationship between the required return, or the cost of common stock equity capital, and the nonsystematic risk of the firm as measured by the beta coefficient.

Accepted Answer

A) True 
 B)False

Question 7

The approximate before-tax cost of debt for a 15-year, 10 percent, $1,000 par value bond selling at$950 is

Accepted Answer

A)  15.4 percent. 
B)  10.6 percent. 
C)  10 percent. 
D)  12 percent. 
A)  15.4 percent. 
B)  10.6 percent. 
C)  10 percent. 
D)  12 percent.

Question 8

The approximate aftertax cost of debt for a 20-year, 7 percent, $1,000 par value bond selling at $960(assume a marginal tax rate of 40 percent) is

Accepted Answer

A)  5.2 percent. 
B)  7.3 percent. 
C)  4.4 percent. 
D)  7 percent. 
A)  5.2 percent. 
B)  7.3 percent. 
C)  4.4 percent. 
D)  7 percent.

Question 9

If a corporation has an average tax rate of 40 percent, the approximate annual, aftertax cost of debtfor a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is

Accepted Answer

A)  6 percent. 
B)  8 percent. 
C)  4.2 percent. 
D)  4.8 percent. 
A)  6 percent. 
B)  8 percent. 
C)  4.2 percent. 
D)  4.8 percent.

Question 10

The breaking point is the level of total new financing at which the cost of one of the financing components rises.

Accepted Answer

A) True 
 B)False

Question 11

Preferred stock represents a special type of ownership interest in the firm and, thus, the preferred stockholders must receive their stated dividends prior to the distribution of any earnings to common stockholders and bondholders.

Accepted Answer

A) True 
 B)False

Question 12

A firm has determined its optimal structure which is composed of the following sources and target market value proportions.
$$\begin{array} { l c } 
\text { Source of capital } & \begin{array} { c } 
\text { Target market } \
\text { Proportions }
\end{array} \
\hline \text { Long-term debt } & 60 \% \
\text { Common stock equity } & 40
\end{array}$$
DEBT:  The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050.  A flotation cost of 2 percent of the face value would be required in addition to the premium of $50.
COMMON STOCK:  A firm's common stock is currently selling for $75 per share.  The dividend expected to be paid at the end of the coming year is $5. Its dividend payments have been growing at a constant rate for the last five years.  Five years ago, the dividend was $3.10.  It is expected that to sell, a new common stock issue must be underpriced $2 per share and the firm must pay $1 per share in flotation costs.  Additionally, the firm has a marginal tax rate of 40 percent.

-The weighted average cost of capital up to the point when retained earnings are exhausted is

Accepted Answer

A)  9.5 percent. 
B)  11.3 percent. 
C)  7.7 percent. 
D)  6.8 percent. 
A)  9.5 percent. 
B)  11.3 percent. 
C)  7.7 percent. 
D)  6.8 percent.

Question 13

The cost utilized in making capital budgeting decisions given an investment opportunity scheduleis

Accepted Answer

A)  the weighted average cost of all bonds issued that are related to the capital budget. 
B)  the weighted average cost of all needed financing for funding. 
C)  the weighted average cost of the last incremental amount of financing. 
D)  the simple average of the cost of the last incremental amount of financing. 
A)  the weighted average cost of all bonds issued that are related to the capital budget. 
B)  the weighted average cost of all needed financing for funding. 
C)  the weighted average cost of the last incremental amount of financing. 
D)  the simple average of the cost of the last incremental amount of financing.

Question 14

As the volume of financing increases, the costs of the various types of financing will decrease, reducing the firm's weighted average cost of capital.

Accepted Answer

A) True 
 B)False

Question 15

A corporation expects to have earnings available to common shareholders (net income minuspreferred dividends) of $1,000,000 in the coming year. The firm plans to pay 40 percent of earningsavailable in cash dividends. If the firm has a target capital structure of 40 percent long-term debt,10 percent preferred stock, and 50 percent common stock equity, what capital budget could thefirm support without issuing new common stock?

Accepted Answer

A)  $800,000 
B)  $600,000 
C)  $2,000,000 
D)  $1,200,000 
A)  $800,000 
B)  $600,000 
C)  $2,000,000 
D)  $1,200,000

Question 16

The cost of common stock equity may be estimated by using the

Accepted Answer

A)  yield curve. 
B)  DuPont analysis. 
C)  Gordon model. 
D)  net present value method. 
A)  yield curve. 
B)  DuPont analysis. 
C)  Gordon model. 
D)  net present value method.

Question 17

Since retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is

Accepted Answer

A)  greater than the cost of new common stock equity. 
B)  less than the cost of new common stock equity. 
C)  not related to the cost of new common stock equity. 
D)  equal to the cost of new common stock equity. 
A)  greater than the cost of new common stock equity. 
B)  less than the cost of new common stock equity. 
C)  not related to the cost of new common stock equity. 
D)  equal to the cost of new common stock equity.

Question 18

The cost of capital is the rate of return a firm must earn on investments in order to leave share price unchanged.

Accepted Answer

A) True 
 B)False

A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals6 percent. The estimated cost of common stock equity is

An investor has expectations of a $4 dividend next year with future dividends growing at 6% in perpetuity. If the investor is willing to pay $80 for the stock, the investor's expected return is 11%.

The firm's beforetax cost of debt is

The specific cost of each source of financing is the after-tax cost of obtaining the financing using the historically based cost reflected by the existing financing on the firm's books.

As the volume of financing increases, the costs of the various types of financing will __________,the firm's weighted average cost of capital.

The capital asset pricing model describes the relationship between the required return, or the cost of common stock equity capital, and the nonsystematic risk of the firm as measured by the beta coefficient.

The approximate before-tax cost of debt for a 15-year, 10 percent, $1,000 par value bond selling at$950 is

The approximate aftertax cost of debt for a 20-year, 7 percent, $1,000 par value bond selling at $960(assume a marginal tax rate of 40 percent) is

If a corporation has an average tax rate of 40 percent, the approximate annual, aftertax cost of debtfor a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is

The breaking point is the level of total new financing at which the cost of one of the financing components rises.

Preferred stock represents a special type of ownership interest in the firm and, thus, the preferred stockholders must receive their stated dividends prior to the distribution of any earnings to common stockholders and bondholders.

The cost utilized in making capital budgeting decisions given an investment opportunity scheduleis

As the volume of financing increases, the costs of the various types of financing will decrease, reducing the firm's weighted average cost of capital.

The cost of common stock equity may be estimated by using the

Since retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is

The cost of capital is the rate of return a firm must earn on investments in order to leave share price unchanged.

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

A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals6 percent. The estimated cost of common stock equity is

An investor has expectations of a $4 dividend next year with future dividends growing at 6% in perpetuity. If the investor is willing to pay $80 for the stock, the investor's expected return is 11%.

The firm's beforetax cost of debt is

The specific cost of each source of financing is the after-tax cost of obtaining the financing using the historically based cost reflected by the existing financing on the firm's books.

As the volume of financing increases, the costs of the various types of financing will __________,the firm's weighted average cost of capital.

The capital asset pricing model describes the relationship between the required return, or the cost of common stock equity capital, and the nonsystematic risk of the firm as measured by the beta coefficient.

The approximate before-tax cost of debt for a 15-year, 10 percent, $1,000 par value bond selling at$950 is

The approximate aftertax cost of debt for a 20-year, 7 percent, $1,000 par value bond selling at $960(assume a marginal tax rate of 40 percent) is

If a corporation has an average tax rate of 40 percent, the approximate annual, aftertax cost of debtfor a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is

The breaking point is the level of total new financing at which the cost of one of the financing components rises.

Preferred stock represents a special type of ownership interest in the firm and, thus, the preferred stockholders must receive their stated dividends prior to the distribution of any earnings to common stockholders and bondholders.

The cost utilized in making capital budgeting decisions given an investment opportunity scheduleis

As the volume of financing increases, the costs of the various types of financing will decrease, reducing the firm's weighted average cost of capital.

The cost of common stock equity may be estimated by using the

Since retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is

The cost of capital is the rate of return a firm must earn on investments in order to leave share price unchanged.

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