Question 1

Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is

Accepted Answer

A)  new common stock, retained earnings, preferred stock, long-term debt. 
B)  common stock, preferred stock, long-term debt, short-term debt. 
C)  preferred stock, retained earnings, common stock, new common stock. 
D)  long-term debt, preferred stock, retained earnings, new common stock. 
A)  new common stock, retained earnings, preferred stock, long-term debt. 
B)  common stock, preferred stock, long-term debt, short-term debt. 
C)  preferred stock, retained earnings, common stock, new common stock. 
D)  long-term debt, preferred stock, retained earnings, new common stock.

Question 2

The cost of common stock equity may be measured using either the constant growth valuation model or the capital asset pricing model.

Accepted Answer

A) True 
 B)False

Question 3

The cost of capital is used to decide whether a proposed corporate investment will increase or decrease the firm's stock price.

Accepted Answer

A) True 
 B)False

Question 4

Since the net proceeds from sale of new common stock will be less than the current market price, the cost of new issues will always be less than the cost of existing issues.

Accepted Answer

A) True 
 B)False

Question 5

Given that the cost of common stock is 18 percent, dividends are $1.50 per share, and the price of the stock is $12.50 per share, what is the annual growth rate of dividends?

Accepted Answer

A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  8 percent 
A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  8 percent

Question 6

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

Question 7

Historical weights are either book value or market value weights based on the actual historical capital structure proportions.

Accepted Answer

A) True 
 B)False

Question 8

The cost of new common stock financing is higher than the cost of retained earnings due to

Accepted Answer

A)  flotation costs and underpricing. 
B)  flotation costs and overpricing. 
C)  flotation costs and commission costs. 
D)  commission costs and overpricing. 
A)  flotation costs and underpricing. 
B)  flotation costs and overpricing. 
C)  flotation costs and commission costs. 
D)  commission costs and overpricing.

Question 9

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 10

A firm has common stock with a market price of $55 per share and an expected dividend of $2.81 per share at the end of the coming year. The dividends paid on the outstanding stock over the past five years are as follows:   The cost of the firm's common stock equity is

Accepted Answer

A)  4.1 percent. 
B)  5.1 percent. 
C)  12.1 percent. 
D)  15.4 percent. 
A)  4.1 percent. 
B)  5.1 percent. 
C)  12.1 percent. 
D)  15.4 percent.

Question 11

Table 9.2
A firm has determined its optimal structure which is composed of the following sources and target market value proportions.   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 firm's after-tax cost of debt is ________. (See Table 9.2)

Accepted Answer

A)  4.6 percent 
B)  6 percent 
C)  7 percent 
D)  7.7 percent 
A)  4.6 percent 
B)  6 percent 
C)  7 percent 
D)  7.7 percent

Question 12

A firm can retain more of its earnings if it can convince its stockholders that it will earn at least their required return on the reinvested funds.

Accepted Answer

A) True 
 B)False

Question 13

The cost of retained earnings equity for Tangshan Mining would be 18.00 percent if the expected return on U.S. Treasury Bills is 5.00 percent, the market return is 10.00 percent, and the firm's beta is 1.3.

Accepted Answer

A) True 
 B)False

Question 14

The cost of capital can be thought of as the rate of return required by the market suppliers of capital in order to attract their funds to the firm.

Accepted Answer

A) True 
 B)False

Question 15

Table 9.1
A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.   Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of
2 percent of the face value would be required in addition to the discount of $40.
Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in floatation costs. Additionally, the firm's marginal tax rate is 40 percent.
-The firm's cost of a new issue of common stock is ________. (See Table 9.1)

Accepted Answer

A)  7 percent 
B)  9.08 percent 
C)  13.2 percent 
D)  14.4 percent 
A)  7 percent 
B)  9.08 percent 
C)  13.2 percent 
D)  14.4 percent

Question 16

What is the dividend on an 8 percent preferred stock that currently sells for $45 and has a face value of $50 per share?

Accepted Answer

A)  $3.33 
B)  $3.60 
C)  $4.00 
D)  $5.00 
A)  $3.33 
B)  $3.60 
C)  $4.00 
D)  $5.00

Question 17

The weighted average cost that reflects the interrelationship of financing decisions can be obtained by weighing the cost of each source of financing by its target proportion in the firm's capital structure.

Accepted Answer

A) True 
 B)False

Question 18

Weights that use accounting values to measure the proportion of each type of capital in the firm's financial structure are called book value weights.

Accepted Answer

A) True 
 B)False

Question 19

In using the cost of capital, it is important that it reflects the historical cost of raising funds over the long run.

Accepted Answer

A) True 
 B)False

Question 20

The cost of common stock equity can be thought of as the "magic number" that is used to decide whether a proposed corporate investment will increase or decrease the firm's stock price.

Accepted Answer

A) True 
 B)False

Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is

The cost of common stock equity may be measured using either the constant growth valuation model or the capital asset pricing model.

The cost of capital is used to decide whether a proposed corporate investment will increase or decrease the firm's stock price.

Since the net proceeds from sale of new common stock will be less than the current market price, the cost of new issues will always be less than the cost of existing issues.

Given that the cost of common stock is 18 percent, dividends are $1.50 per share, and the price of the stock is $12.50 per share, what is the annual growth rate of dividends?

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

Historical weights are either book value or market value weights based on the actual historical capital structure proportions.

The cost of new common stock financing is higher than the cost of retained earnings due to

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.

A firm has common stock with a market price of $55 per share and an expected dividend of $2.81 per share at the end of the coming year. The dividends paid on the outstanding stock over the past five years are as follows: The cost of the firm's common stock equity is

A firm can retain more of its earnings if it can convince its stockholders that it will earn at least their required return on the reinvested funds.

The cost of retained earnings equity for Tangshan Mining would be 18.00 percent if the expected return on U.S. Treasury Bills is 5.00 percent, the market return is 10.00 percent, and the firm's beta is 1.3.

The cost of capital can be thought of as the rate of return required by the market suppliers of capital in order to attract their funds to the firm.

What is the dividend on an 8 percent preferred stock that currently sells for $45 and has a face value of $50 per share?

The weighted average cost that reflects the interrelationship of financing decisions can be obtained by weighing the cost of each source of financing by its target proportion in the firm's capital structure.

Weights that use accounting values to measure the proportion of each type of capital in the firm's financial structure are called book value weights.

In using the cost of capital, it is important that it reflects the historical cost of raising funds over the long run.

The cost of common stock equity can be thought of as the "magic number" that is used to decide whether a proposed corporate investment will increase or decrease the firm's stock price.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters

Exam 9: The Cost of Capital

Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is

The cost of common stock equity may be measured using either the constant growth valuation model or the capital asset pricing model.

The cost of capital is used to decide whether a proposed corporate investment will increase or decrease the firm's stock price.

Since the net proceeds from sale of new common stock will be less than the current market price, the cost of new issues will always be less than the cost of existing issues.

Given that the cost of common stock is 18 percent, dividends are $1.50 per share, and the price of the stock is $12.50 per share, what is the annual growth rate of dividends?

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

Historical weights are either book value or market value weights based on the actual historical capital structure proportions.

The cost of new common stock financing is higher than the cost of retained earnings due to

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.

A firm has common stock with a market price of $55 per share and an expected dividend of $2.81 per share at the end of the coming year. The dividends paid on the outstanding stock over the past five years are as follows: The cost of the firm's common stock equity is

A firm can retain more of its earnings if it can convince its stockholders that it will earn at least their required return on the reinvested funds.

The cost of retained earnings equity for Tangshan Mining would be 18.00 percent if the expected return on U.S. Treasury Bills is 5.00 percent, the market return is 10.00 percent, and the firm's beta is 1.3.

The cost of capital can be thought of as the rate of return required by the market suppliers of capital in order to attract their funds to the firm.

What is the dividend on an 8 percent preferred stock that currently sells for $45 and has a face value of $50 per share?

The weighted average cost that reflects the interrelationship of financing decisions can be obtained by weighing the cost of each source of financing by its target proportion in the firm's capital structure.

Weights that use accounting values to measure the proportion of each type of capital in the firm's financial structure are called book value weights.

In using the cost of capital, it is important that it reflects the historical cost of raising funds over the long run.

The cost of common stock equity can be thought of as the "magic number" that is used to decide whether a proposed corporate investment will increase or decrease the firm's stock price.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters

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