Question 1

Which of these makes this a true statement? The WACC formula:

Accepted Answer

A) is not impacted by taxes. 
B) uses the after-tax costs of capital to compute the firm's weighted average cost of debt financing. 
C) uses the pre-tax costs of capital to compute the firm's weighted average cost of debt financing. 
D) focuses on operating costs only to keep them separate from financing costs. 
A) is not impacted by taxes. 
B) uses the after-tax costs of capital to compute the firm's weighted average cost of debt financing. 
C) uses the pre-tax costs of capital to compute the firm's weighted average cost of debt financing. 
D) focuses on operating costs only to keep them separate from financing costs.

Question 2

Cup Cake Ltd. has 20 million shares of stock outstanding selling at $25 per share and an issue of $30 million in 8 percent, annual coupon bonds with a maturity of 16 years, selling at 98 percent of par ($1,000). If Cup Cake's weighted average tax rate is 34 percent, its next dividend is expected to be $2.00 per share, and all future dividends are expected to grow at 4 percent per year, indefinitely, what is its WACC?

Accepted Answer

A) 7.94 percent 
B) 10.00 percent 
C) 11.64 percent 
D) 11.79 percent 
A) 7.94 percent 
B) 10.00 percent 
C) 11.64 percent 
D) 11.79 percent

Question 3

TAFKAP Industries has 8 million shares of stock outstanding selling at $17 per share and an issue of $20 million in 7.5 percent, annual coupon bonds with a maturity of 15 years, selling at 109 percent of par ($1,000). If TAFKAP's weighted average tax rate is 34% and its cost of equity is 12.5 percent, what is TAFKAP's WACC?

Accepted Answer

A) 11.02 percent 
B) 11.37 percent 
C) 12.16 percent 
D) 12.83 percent 
A) 11.02 percent 
B) 11.37 percent 
C) 12.16 percent 
D) 12.83 percent

Question 4

When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm's cash flows as:

Accepted Answer

A) a simple average of the capital components costs. 
B) a sum of the capital components costs. 
C) a weighted average of the capital components costs. 
D) they apply to each asset as they are purchased with their respective forms of debt or equity. 
A) a simple average of the capital components costs. 
B) a sum of the capital components costs. 
C) a weighted average of the capital components costs. 
D) they apply to each asset as they are purchased with their respective forms of debt or equity.

Question 5

The ___________ approach to computing a divisional weighted average cost of capital (WACC) uses the average beta of projects in each division to calculate the WACC.

Accepted Answer

A) subjective 
B) objective 
C) firmwide 
D) implicit 
A) subjective 
B) objective 
C) firmwide 
D) implicit

Question 6

Which statement makes this a false statement? When a firm pays commissions to underwriting firms that float the issuance of new stock:

Accepted Answer

A) the component cost will need to be integrated to figure project WACCs. 
B) the component cost will need to be integrated only for the firm's WACC. 
C) the firm can increase the project's WACC to incorporate the flotation costs' impact. 
D) the firm can leave the WACC alone and adjust the project's initial investment upwards. 
A) the component cost will need to be integrated to figure project WACCs. 
B) the component cost will need to be integrated only for the firm's WACC. 
C) the firm can increase the project's WACC to incorporate the flotation costs' impact. 
D) the firm can leave the WACC alone and adjust the project's initial investment upwards.

Question 7

Why do we use market-value weights instead of book-value weights?

Accepted Answer

A) Because firms often "window-dress" their financial statements. 
B) Because we are interested in determining what the cost of financing the firm's assets would be given today's market situation and the component costs the firm currently faces, not what the historical prices would have been. 
C) Because it is required in the Sarbanes-Oxley regulations. 
D) None of these answers are correct. 
A) Because firms often "window-dress" their financial statements. 
B) Because we are interested in determining what the cost of financing the firm's assets would be given today's market situation and the component costs the firm currently faces, not what the historical prices would have been. 
C) Because it is required in the Sarbanes-Oxley regulations. 
D) None of these answers are correct.

Question 8

ADK has 30,000 15-year 9 percent semi-annual coupon bonds outstanding. If the bonds currently sell for 90 percent of par and the firm pays an average tax rate of 32 percent, what will be the before-tax and after-tax component cost of debt?

Accepted Answer

A) 11.19 percent; 7.61 percent 
B) 10.32 percent; 7.02 percent 
C) 9.85 percent; 6.70 percent 
D) 10.12 percent; 6.88 percent 
A) 11.19 percent; 7.61 percent 
B) 10.32 percent; 7.02 percent 
C) 9.85 percent; 6.70 percent 
D) 10.12 percent; 6.88 percent

Question 9

Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $1,190. If the firm's after-tax cost of debt is 5 percent, what was the firm's tax rate?

Accepted Answer

A) 21.51 percent 
B) 34.50 percent 
C) 44.50 percent 
D) 36.50 percent 
A) 21.51 percent 
B) 34.50 percent 
C) 44.50 percent 
D) 36.50 percent

Question 10

FarCry Industries, a maker of telecommunications equipment, has 6 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $27 per share, the preferred shares are selling for $15 per share, and the bonds are selling for 119 percent of par ($1,000), what weight should you use for debt in the computation of FarCry's WACC?

Accepted Answer

A) 4.93 percent 
B) 5.07 percent 
C) 5.81 percent 
D) 6.30 percent 
A) 4.93 percent 
B) 5.07 percent 
C) 5.81 percent 
D) 6.30 percent

Question 11

JLP Industries has 6.5 million shares of common stock outstanding with a market price of $20.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 25,000 bonds outstanding, each with a $1,000 face value and selling at 90 percent of par value. The cost of equity is 14 percent, the cost of preferred is 10 percent, and the cost of debt is 6.25 percent. If JLP's tax rate is 34 percent, what is the WACC?

Accepted Answer

A) 12.39 percent 
B) 12.98 percent 
C) 13.13 percent 
D) 13.72 percent 
A) 12.39 percent 
B) 12.98 percent 
C) 13.13 percent 
D) 13.72 percent

Question 12

Suppose that Hanna Nails, Inc.'s capital structure features 45 percent equity, 55 percent debt, and that its before-tax cost of debt is 5 percent, while its cost of equity is 9 percent. If the appropriate weighted average tax rate is 40 percent, what will be Hanna Nails' WACC?

Accepted Answer

A) 5.18 percent 
B) 5.70 percent 
C) 6.80 percent 
D) 7.00 percent 
A) 5.18 percent 
B) 5.70 percent 
C) 6.80 percent 
D) 7.00 percent

Question 13

Which of the following makes this a true statement? If the new project does significantly increase the firm's overall risk:

Accepted Answer

A) the increased risk will be borne equally amongst the bond holders, preferred stockholders, and common stockholders. 
B) the increased risk will be borne disproportionately by bond holders. 
C) the increased risk will be borne disproportionately by preferred stockholders. 
D) the increased risk will be borne disproportionately by common stockholders. 
A) the increased risk will be borne equally amongst the bond holders, preferred stockholders, and common stockholders. 
B) the increased risk will be borne disproportionately by bond holders. 
C) the increased risk will be borne disproportionately by preferred stockholders. 
D) the increased risk will be borne disproportionately by common stockholders.

Question 14

Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $890. The firm's tax rate is 36 percent. What is the firm's after-tax cost of debt?

Accepted Answer

A) 10.86 percent 
B) 3.91 percent 
C) 9.81 percent 
D) 6.95 percent 
A) 10.86 percent 
B) 3.91 percent 
C) 9.81 percent 
D) 6.95 percent

Question 15

Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $790. If the firm's after-tax cost of debt is 8 percent, what was the firm's tax rate?

Accepted Answer

A) 23.11 percent 
B) 34.50 percent 
C) 44.50 percent 
D) 37.74 percent 
A) 23.11 percent 
B) 34.50 percent 
C) 44.50 percent 
D) 37.74 percent

Question 16

Marme Inc. has preferred stock selling for 137 percent of par that pays an 11 percent annual dividend. What would be Marme's component cost of preferred stock?

Accepted Answer

A) 11.00 percent 
B) 8.03 percent 
C) 8.17 percent 
D) 10.16 percent 
A) 11.00 percent 
B) 8.03 percent 
C) 8.17 percent 
D) 10.16 percent

Question 17

WC Inc. has a $10 million (face value), 10-year bond issue selling for 99 percent of par that pays an annual coupon of 9 percent. What would be WC's before-tax component cost of debt?

Accepted Answer

A) 9.00 percent 
B) 9.10 percent 
C) 9.16 percent 
D) 18.32 percent 
A) 9.00 percent 
B) 9.10 percent 
C) 9.16 percent 
D) 18.32 percent

Question 18

What is the theoretical minimum for the weighted average cost of capital?

Accepted Answer

A) The after-tax cost of debt 
B) The cost of preferred stock 
C) CAPM 
D) The cost of equity 
A) The after-tax cost of debt 
B) The cost of preferred stock 
C) CAPM 
D) The cost of equity

Which of these makes this a true statement? The WACC formula:

When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm's cash flows as:

The ___________ approach to computing a divisional weighted average cost of capital (WACC) uses the average beta of projects in each division to calculate the WACC.

Which statement makes this a false statement? When a firm pays commissions to underwriting firms that float the issuance of new stock:

Why do we use market-value weights instead of book-value weights?

ADK has 30,000 15-year 9 percent semi-annual coupon bonds outstanding. If the bonds currently sell for 90 percent of par and the firm pays an average tax rate of 32 percent, what will be the before-tax and after-tax component cost of debt?

Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $1,190. If the firm's after-tax cost of debt is 5 percent, what was the firm's tax rate?

Suppose that Hanna Nails, Inc.'s capital structure features 45 percent equity, 55 percent debt, and that its before-tax cost of debt is 5 percent, while its cost of equity is 9 percent. If the appropriate weighted average tax rate is 40 percent, what will be Hanna Nails' WACC?

Which of the following makes this a true statement? If the new project does significantly increase the firm's overall risk:

Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $890. The firm's tax rate is 36 percent. What is the firm's after-tax cost of debt?

Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $790. If the firm's after-tax cost of debt is 8 percent, what was the firm's tax rate?

Marme Inc. has preferred stock selling for 137 percent of par that pays an 11 percent annual dividend. What would be Marme's component cost of preferred stock?

WC Inc. has a $10 million (face value), 10-year bond issue selling for 99 percent of par that pays an annual coupon of 9 percent. What would be WC's before-tax component cost of debt?

What is the theoretical minimum for the weighted average cost of capital?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Filters

Exam 11: Calculating the Cost of Capital

Which of these makes this a true statement? The WACC formula:

When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm's cash flows as:

The ___________ approach to computing a divisional weighted average cost of capital (WACC) uses the average beta of projects in each division to calculate the WACC.

Which statement makes this a false statement? When a firm pays commissions to underwriting firms that float the issuance of new stock:

Why do we use market-value weights instead of book-value weights?

ADK has 30,000 15-year 9 percent semi-annual coupon bonds outstanding. If the bonds currently sell for 90 percent of par and the firm pays an average tax rate of 32 percent, what will be the before-tax and after-tax component cost of debt?

Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $1,190. If the firm's after-tax cost of debt is 5 percent, what was the firm's tax rate?

Suppose that Hanna Nails, Inc.'s capital structure features 45 percent equity, 55 percent debt, and that its before-tax cost of debt is 5 percent, while its cost of equity is 9 percent. If the appropriate weighted average tax rate is 40 percent, what will be Hanna Nails' WACC?

Which of the following makes this a true statement? If the new project does significantly increase the firm's overall risk:

Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $890. The firm's tax rate is 36 percent. What is the firm's after-tax cost of debt?

Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $790. If the firm's after-tax cost of debt is 8 percent, what was the firm's tax rate?

Marme Inc. has preferred stock selling for 137 percent of par that pays an 11 percent annual dividend. What would be Marme's component cost of preferred stock?

WC Inc. has a $10 million (face value), 10-year bond issue selling for 99 percent of par that pays an annual coupon of 9 percent. What would be WC's before-tax component cost of debt?

What is the theoretical minimum for the weighted average cost of capital?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Filters