As the assistant to the CFO of Johnstone Inc.,you must estimate its cost of common equity.You have been provided with the following data: D0 = $0.80; P0 = $22.50; and g = 8.00% (constant).Based on the DCF approach,what is the cost of common from reinvested earnings?

A) 10.69% B) 11.25% C) 11.84% D) 12.43% E) 13.05% A) 10.69% B) 11.25% C) 11.84% D) 12.43% E) 13.05%

To help them estimate the company's cost of capital,Smithco has hired you as a consultant.You have been provided with the following data: D1 = $1.45; P0 = $22.50; and g = 6.50% (constant).Based on the DCF approach,what is the cost of common from reinvested earnings?

A) 11.10% B) 11.68% C) 12.30% D) 12.94% E) 13.59% A) 11.10% B) 11.68% C) 12.30% D) 12.94% E) 13.59%

Exam 11: Determining the Cost of Capital

The Lincoln Company sold a $1,000 par value,noncallable bond several years ago that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually.The bond currently sells for $925 and the company's tax rate is 40%.What is the component cost of debt for use in the WACC calculation?

(Multiple Choice)

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Question 61

The Anderson Company has equal amounts of low-risk,average-risk,and high-risk projects.The firm's overall WACC is 12%.The CFO believes that this is the correct WACC for the company's average-risk projects,but that a lower rate should be used for lower-risk projects and a higher rate for higher-risk projects.The CEO disagrees,on the grounds that even though projects have different risks,the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources.If the CEO's position is accepted,what is likely to happen over time?

(Multiple Choice)

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Question 62

Firm J's earnings and stock price tend to move up and down with other firms in the S&P 500,while Firm F's earnings and stock price move counter cyclically with J and other S&P companies.Both J and F estimate their costs of equity using the CAPM,they have identical market values,their standard deviations of returns are identical,and they both finance only with common equity.Which of the following statements is CORRECT?

(Multiple Choice)

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Question 63

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 64

Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC)for use in capital budgeting?

(Multiple Choice)

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Question 65

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 66

To estimate the company's WACC,Marshall Inc.recently hired you as a consultant.You have obtained the following information. (1)The firm's noncallable bonds mature in 20 years,have an 8.00% annual coupon,a par value of $1,000,and a market price of $1,050.00. (2)The company's tax rate is 40%. (3)The risk-free rate is 4.50%,the market risk premium is 5.50%,and the stock's beta is 1.20. (4)The target capital structure consists of 35% debt and the balance is common equity.The firm uses the CAPM to estimate the cost of common stock,and it does not expect to issue any new shares.What is its WACC?

(Multiple Choice)

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Question 67

For a typical firm,which of the following sequences is CORRECT? All rates are after taxes,and assume that the firm operates at its target capital structure.

(Multiple Choice)

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Question 68

The cost of common equity obtained by retaining earnings is the rate of return the marginal stockholder requires on the firm's common stock.

(True/False)

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Question 69

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 70

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 71

When estimating the cost of equity by use of the bond-yield-plus-risk-premium method,we can generally get a good idea of the interest rate on new long-term debt,but we cannot be sure that the risk premium we add is appropriate.This problem leaves us unsure of the true value of r_s.

(True/False)

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Question 72

The higher the firm's flotation cost for new common equity,the more likely the firm is to use preferred stock,which has no flotation cost,and reinvested earnings,whose cost is the average return on the assets that are acquired.

(True/False)

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Question 73

Firms raise capital at the total corporate level by retaining earnings and by obtaining funds in the capital markets.They then provide funds to their different divisions for investment in capital projects.The divisions may vary in risk,and the projects within the divisions may also vary in risk.Therefore,it is conceptually correct to use different risk-adjusted costs of capital for different capital budgeting projects.

(True/False)

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Question 74

As the assistant to the CFO of Johnstone Inc.,you must estimate its cost of common equity.You have been provided with the following data: D₀ = $0.80; P₀ = $22.50; and g = 8.00% (constant).Based on the DCF approach,what is the cost of common from reinvested earnings?

(Multiple Choice)

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Question 75

Suppose you are the president of a small,publicly-traded corporation.Since you believe that your firm's stock price is temporarily depressed,all additional capital funds required during the current year will be raised using debt.In this case,the appropriate marginal cost of capital for use in capital budgeting during the current year is the after-tax cost of debt.

(True/False)

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Question 76

To help them estimate the company's cost of capital,Smithco has hired you as a consultant.You have been provided with the following data: D₁ = $1.45; P₀ = $22.50; and g = 6.50% (constant).Based on the DCF approach,what is the cost of common from reinvested earnings?

(Multiple Choice)

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Question 77

Since 70% of the preferred dividends received by a corporation are excluded from taxable income,the component cost of equity for a company that pays half of its earnings out as common dividends and half as preferred dividends should,theoretically,be Cost of equity = r_s(0.30)(0.50)+ r_ps(1 − T)(0.70)(0.50).

(True/False)

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Question 78

"Capital" is sometimes defined as funds supplied to a firm by investors.

(True/False)

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Question 79

When estimating the cost of equity by use of the DCF method,the single biggest potential problem is to determine the growth rate that investors use when they estimate a stock's expected future rate of return.This problem leaves us unsure of the true value of r_s.

(True/False)

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Question 80

Showing 61 - 80 of 92

Exam 11: Determining the Cost of Capital

Which of the following statements is CORRECT?

Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC)for use in capital budgeting?

Which of the following statements is CORRECT?

For a typical firm,which of the following sequences is CORRECT? All rates are after taxes,and assume that the firm operates at its target capital structure.

The cost of common equity obtained by retaining earnings is the rate of return the marginal stockholder requires on the firm's common stock.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

When estimating the cost of equity by use of the bond-yield-plus-risk-premium method,we can generally get a good idea of the interest rate on new long-term debt,but we cannot be sure that the risk premium we add is appropriate.This problem leaves us unsure of the true value of rs.

The higher the firm's flotation cost for new common equity,the more likely the firm is to use preferred stock,which has no flotation cost,and reinvested earnings,whose cost is the average return on the assets that are acquired.

As the assistant to the CFO of Johnstone Inc.,you must estimate its cost of common equity.You have been provided with the following data: D0 = $0.80; P0 = $22.50; and g = 8.00% (constant).Based on the DCF approach,what is the cost of common from reinvested earnings?

To help them estimate the company's cost of capital,Smithco has hired you as a consultant.You have been provided with the following data: D1 = $1.45; P0 = $22.50; and g = 6.50% (constant).Based on the DCF approach,what is the cost of common from reinvested earnings?

"Capital" is sometimes defined as funds supplied to a firm by investors.

When estimating the cost of equity by use of the DCF method,the single biggest potential problem is to determine the growth rate that investors use when they estimate a stock's expected future rate of return.This problem leaves us unsure of the true value of rs.

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Capital Budgeting: Decision Rules

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: a Review

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

Filters

When estimating the cost of equity by use of the bond-yield-plus-risk-premium method,we can generally get a good idea of the interest rate on new long-term debt,but we cannot be sure that the risk premium we add is appropriate.This problem leaves us unsure of the true value of r_s.

As the assistant to the CFO of Johnstone Inc.,you must estimate its cost of common equity.You have been provided with the following data: D₀ = $0.80; P₀ = $22.50; and g = 8.00% (constant).Based on the DCF approach,what is the cost of common from reinvested earnings?

To help them estimate the company's cost of capital,Smithco has hired you as a consultant.You have been provided with the following data: D₁ = $1.45; P₀ = $22.50; and g = 6.50% (constant).Based on the DCF approach,what is the cost of common from reinvested earnings?

When estimating the cost of equity by use of the DCF method,the single biggest potential problem is to determine the growth rate that investors use when they estimate a stock's expected future rate of return.This problem leaves us unsure of the true value of r_s.