Exam 18: Capital Structure and the Cost of Capital

Which of the following costs must be adjusted to an after-tax cost?

The ratio of debt to stock market equity has generally been lowest for the largest of U.S. firms.

If a firm has current earnings per share of $2 and a degree of financial leverage of 4, a 10% increase in sales would result in earnings per share of:

The after-tax cost of debt for a firm in the 35% tax bracket with a before-tax cost of debt of 6% is:

Of the components shown below, which is least likely to be of value in calculating the cost of preferred stock?

Corporate stock prices are extremely stable over time.

All of the following statements are correct except:

Other factors being constant, higher fixed financial costs mean:

Flotation costs include all of the following, except:

The degree of financial leverage measures the sensitivity of __________ to changes in __________.

A lower weighted average cost of capital gives lower project NPVs.

All of the following statements are correct except:

The sustainable growth rate measures how quickly a firm can grow when it uses both internal equity and debt financing to keep its capital structure constant over time.

The ratio of long-term debt to GDP for non-financial U.S. corporations declined drastically during the late 1990s.

The probability of financial distress and bankruptcy rises as a firm's bond ratings decline.

Firms prefer to issue stock when earnings expectations by the market are overly optimistic.

When the interest expense is zero, the percentage change in earnings per share will be the same as the percentage change in EBIT.

All of the following statements are correct except:

The firm's optimum debt/equity mix minimizes the firm's cost of capital, which in turn will help the firm to maximize shareholder wealth.

The internal growth rate measures how quickly a firm can increase its asset base over the next year without raising outside funds.