Question 1

The relative proportion of debt,equity,and other securities that a firm has outstanding constitute its

Accepted Answer

A)  asset ratio. 
B)  current ratio. 
C)  capital structure. 
D)  value structure. 
E)  enterprise value. 
A)  asset ratio. 
B)  current ratio. 
C)  capital structure. 
D)  value structure. 
E)  enterprise value.

Question 2

Portentious Door Company has outstanding corporate debt paying a 5% semiannual coupon,with a current yield to maturity of 6%.If the firm's tax rate is 15%,what is its effective cost of debt?

Accepted Answer

A)  5% 
B)  4.25% 
C)  5.1% 
D)  6% 
E)  5.5% 
A)  5% 
B)  4.25% 
C)  5.1% 
D)  6% 
E)  5.5%

Question 3

Anheuser Busch,a manufacturer of beverages,is planning to purchase Six Flags theme parks.Anheuser Busch should use the ________ to evaluate the business of Six Flags.

Accepted Answer

A)  WACC of Anheuser Busch 
B)  WACC of Six Flags 
C)  average market return 
D)  cost of debt 
E)  cost of equity 
A)  WACC of Anheuser Busch 
B)  WACC of Six Flags 
C)  average market return 
D)  cost of debt 
E)  cost of equity

Question 4

The WACC does not depend on the risk of a company's line of business.

Accepted Answer

A) True 
 B)False

Question 5

The firm's overall cost of capital that is a blend of the costs of the different sources of capital is known as the firm's

Accepted Answer

A)  weighted average cost of capital. 
B)  cost of equity infusion. 
C)  cost of debt. 
D)  cost of preferred stock. 
E)  cost of financing. 
A)  weighted average cost of capital. 
B)  cost of equity infusion. 
C)  cost of debt. 
D)  cost of preferred stock. 
E)  cost of financing.

Question 6

Apple computers has raised all its capital via equity rather than debt.Such a firm is also referred to as a(n)________ firm.

Accepted Answer

A)  levered 
B)  margined 
C)  risk less 
D)  unlevered 
E)  risky 
A)  levered 
B)  margined 
C)  risk less 
D)  unlevered 
E)  risky

Question 7

A firm has $8 billion of common stock and $14 billion of debt.The cost of equity is 7.5%,and the pretax cost of debt is 3.8%.If the firm's tax rate is 30%,what is the firm's WACC?

Accepted Answer

A)  4.84% 
B)  3.6% 
C)  5.15% 
D)  4.42% 
E)  5.65% 
A)  4.84% 
B)  3.6% 
C)  5.15% 
D)  4.42% 
E)  5.65%

Question 8

The total market value of General Motors (GM)is $10 billion.GM has a market value of $7 billion of equity and a face value of $10 billion of debt.What are the weights in equity and debt that are used for calculating the WACC?

Accepted Answer

A)  0.6, 0.4 
B)  0.7, 0.3 
C)  0.3, 0.7 
D)  0.5, 0.5 
E)  0.4, 0.6 
A)  0.6, 0.4 
B)  0.7, 0.3 
C)  0.3, 0.7 
D)  0.5, 0.5 
E)  0.4, 0.6

Question 9

Verano Inc.has two business divisions-a software product line and a waste water clean-up product line.The software business has a cost of equity capital of 11% and the waste water clean-up business has a cost of equity capital of 6%.Verano has 50% of its revenue from software and the rest from the waste water business.Verano is considering a purchase of another company in the waste water business using equity financing.What is the appropriate cost of capital to evaluate the business?

Accepted Answer

A)  11% 
B)  8.5% 
C)  6% 
D)  9.3% 
E)  7.6% 
A)  11% 
B)  8.5% 
C)  6% 
D)  9.3% 
E)  7.6%

Question 10

A firm incurs $70,000 in interest expenses each year.If the tax rate of the firm is 20%,what is the effective after-tax interest rate expense for the firm?

Accepted Answer

A)  $37,000 
B)  $49,000 
C)  $56,000 
D)  $65,000 
E)  $72,000 
A)  $37,000 
B)  $49,000 
C)  $56,000 
D)  $65,000 
E)  $72,000

Question 11

The outstanding debt of Berstin Corp.has five years to maturity,a current yield of 6%,and a price of $95.Assume the debt has a face value of $100.What is the pretax cost of debt if the tax rate is 30%?

Accepted Answer

A)  4.2% 
B)  4.8% 
C)  6.9% 
D)  7.3% 
E)  7.7% 
A)  4.2% 
B)  4.8% 
C)  6.9% 
D)  7.3% 
E)  7.7%

Question 12

A firm has $3 million market value and it sells preferred stock with a par value of $100.If the coupon rate on the preferred stock is 9% and the preferred stock trades at $95,what is the cost of preferred stock financing?

Accepted Answer

A)  8.75% 
B)  9.47% 
C)  10.21% 
D)  10.41% 
E)  10.44% 
A)  8.75% 
B)  9.47% 
C)  10.21% 
D)  10.41% 
E)  10.44%

Question 13

Different divisions with differing lines of business use different costs of capital because their cost of equity is different and also because the ________ could be different.

Accepted Answer

A)  optimal volatility 
B)  optimal current ratio 
C)  optimal asset mix 
D)  optimal debt-equity ratio 
E)  cost of debt 
A)  optimal volatility 
B)  optimal current ratio 
C)  optimal asset mix 
D)  optimal debt-equity ratio 
E)  cost of debt

Question 14

Asterix Corp has debt with a book value of $20 million,currently trading at 85% of book value.It also has book value of equity of $30 million,and 2 million shares of common stock trading at $4.75 per share.What weights should Asterix use for debt and equity in calculating its WACC?

Accepted Answer

A)  0.64, 0.36 
B)  0.4, 0.6 
C)  0.68, 0.32 
D)  0.5, 0.5 
E)  0.6, 0.4 
A)  0.64, 0.36 
B)  0.4, 0.6 
C)  0.68, 0.32 
D)  0.5, 0.5 
E)  0.6, 0.4

Question 15

Is it incorrect to use the coupon rate of debt toward cost of debt?

Accepted Answer

Yes,it is inaccurate to use th

Question 16

Billy Burger Corp has a market value of debt of $245 million,and a market value of equity of $815 million. What weights should Billy Burger use for debt and equity in calculating its WACC?

Accepted Answer

A)  0.30, 0.70 
B)  0.23, 0.77 
C)  0.70, 0.30 
D)  0.5, 0.5 
E)  0.6, 0.4 
A)  0.30, 0.70 
B)  0.23, 0.77 
C)  0.70, 0.30 
D)  0.5, 0.5 
E)  0.6, 0.4

Question 17

Your estimate of the market risk premium is 6%.The risk-free rate of return is 4.5% and General Motors has a beta of 1.6.What is General Motors' cost of equity capital?

Accepted Answer

A)  14.1% 
B)  13.5% 
C)  13.9% 
D)  14.4% 
E)  14.8% 
A)  14.1% 
B)  13.5% 
C)  13.9% 
D)  14.4% 
E)  14.8%

Question 18

To attract capital from outside investors,a firm must offer potential investors an expected return that is commensurate with the level of risk that they can bear.

Accepted Answer

A) True 
 B)False

Question 19

What types of adjustment to debt are prevalent in practice?

Accepted Answer

Most practitioners would use n

Question 20

A firm has $1 million market value and it sells preferred stock with a par value of $100.If the coupon rate on the preferred stock is 7% and the preferred stock trades at $95,what is the cost of preferred stock financing?

Accepted Answer

A)  6.75% 
B)  7.15% 
C)  7.21% 
D)  7.37% 
E)  8.12% 
A)  6.75% 
B)  7.15% 
C)  7.21% 
D)  7.37% 
E)  8.12%

Exam 12: Determining the Cost of Capital

The relative proportion of debt,equity,and other securities that a firm has outstanding constitute its

Portentious Door Company has outstanding corporate debt paying a 5% semiannual coupon,with a current yield to maturity of 6%.If the firm's tax rate is 15%,what is its effective cost of debt?

Anheuser Busch,a manufacturer of beverages,is planning to purchase Six Flags theme parks.Anheuser Busch should use the ________ to evaluate the business of Six Flags.

The WACC does not depend on the risk of a company's line of business.

The firm's overall cost of capital that is a blend of the costs of the different sources of capital is known as the firm's

Apple computers has raised all its capital via equity rather than debt.Such a firm is also referred to as a(n)________ firm.

A firm has $8 billion of common stock and $14 billion of debt.The cost of equity is 7.5%,and the pretax cost of debt is 3.8%.If the firm's tax rate is 30%,what is the firm's WACC?

The total market value of General Motors (GM)is $10 billion.GM has a market value of $7 billion of equity and a face value of $10 billion of debt.What are the weights in equity and debt that are used for calculating the WACC?

A firm incurs $70,000 in interest expenses each year.If the tax rate of the firm is 20%,what is the effective after-tax interest rate expense for the firm?

The outstanding debt of Berstin Corp.has five years to maturity,a current yield of 6%,and a price of $95.Assume the debt has a face value of $100.What is the pretax cost of debt if the tax rate is 30%?

A firm has $3 million market value and it sells preferred stock with a par value of $100.If the coupon rate on the preferred stock is 9% and the preferred stock trades at $95,what is the cost of preferred stock financing?

Different divisions with differing lines of business use different costs of capital because their cost of equity is different and also because the ________ could be different.

Asterix Corp has debt with a book value of $20 million,currently trading at 85% of book value.It also has book value of equity of $30 million,and 2 million shares of common stock trading at $4.75 per share.What weights should Asterix use for debt and equity in calculating its WACC?

Is it incorrect to use the coupon rate of debt toward cost of debt?

Billy Burger Corp has a market value of debt of $245 million,and a market value of equity of $815 million. What weights should Billy Burger use for debt and equity in calculating its WACC?

Your estimate of the market risk premium is 6%.The risk-free rate of return is 4.5% and General Motors has a beta of 1.6.What is General Motors' cost of equity capital?

To attract capital from outside investors,a firm must offer potential investors an expected return that is commensurate with the level of risk that they can bear.

What types of adjustment to debt are prevalent in practice?

A firm has $1 million market value and it sells preferred stock with a par value of $100.If the coupon rate on the preferred stock is 7% and the preferred stock trades at $95,what is the cost of preferred stock financing?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

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