Question 1

The ________ is the firm's desired optimal mix of debt and equity financing.

Accepted Answer

A)  book value 
B)  market value 
C)  cost of capital 
D)  target capital structure 
A)  book value 
B)  market value 
C)  cost of capital 
D)  target capital structure

Question 2

Tangshan Mining is considering issuing preferred stock. The preferred stock would have a par value of $75, and a 5.50 percent dividend. What is the cost of preferred stock for Tangshan if flotation costs would amount to 5.5 percent of par value?

Accepted Answer

A)  5.50% 
B)  5.27% 
C)  7.73% 
D)  5.82% 
A)  5.50% 
B)  5.27% 
C)  7.73% 
D)  5.82%

Question 3

In calculating the cost of common stock equity

Accepted Answer

A)  the use of the capital asset pricing model (CAPM) is often preferred, because the data required are more readily available. 
B)  the use of the CAPM is preferred, because it more directly calculates risk. 
C)  the use of the constant growth valuation model is often preferred, because the data required are more readily available. 
D)  the use of the constant growth valuation model is often preferred, because it has a stronger theoretical foundation. 
A)  the use of the capital asset pricing model (CAPM) is often preferred, because the data required are more readily available. 
B)  the use of the CAPM is preferred, because it more directly calculates risk. 
C)  the use of the constant growth valuation model is often preferred, because the data required are more readily available. 
D)  the use of the constant growth valuation model is often preferred, because it has a stronger theoretical foundation.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Table 9.3
Balance Sheet
General Talc Mines
December 31, 2003  
-General Talc Mines has compiled the following data regarding the market value and cost of the specific sources of capital.   Market price per share of common stock $50 Market value of long-term debt $980 per bondThe weighted average cost of capital using market value weights is ________.(See Table 9.3)

Accepted Answer

A)  11.7 percent. 
B)  13.5 percent. 
C)  15.8 percent. 
D)  17.5 percent. 
A)  11.7 percent. 
B)  13.5 percent. 
C)  15.8 percent. 
D)  17.5 percent.

Question 6

The approximate before-tax cost of debt for a 15-year, 10 percent, $1,000 par value bond selling at $950 is

Accepted Answer

A)  10 percent. 
B)  10.6 percent. 
C)  12 percent. 
D)  15.4 percent. 
A)  10 percent. 
B)  10.6 percent. 
C)  12 percent. 
D)  15.4 percent.

Question 7

The cost of capital acts as a major link between the firm's long-term investment decisions and the wealth of the owners as determined by investors in the marketplace.

Accepted Answer

A) True 
 B)False

Question 8

A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of the preferred stock is

Accepted Answer

A)  7.2 percent. 
B)  12 percent. 
C)  12.4 percent. 
D)  15 percent. 
A)  7.2 percent. 
B)  12 percent. 
C)  12.4 percent. 
D)  15 percent.

Question 9

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.
-Assuming the firm plans to pay out all of its earnings as dividends, the weighted average cost of capital is ________. (See Table 9.2)

Accepted Answer

A)  9.6 percent 
B)  10.9 percent 
C)  11.6 percent 
D)  12.1 percent 
A)  9.6 percent 
B)  10.9 percent 
C)  11.6 percent 
D)  12.1 percent

Question 10

From a bond issuer's perspective, the IRR on a bond's cash flows is its cost to maturity; from the investor's perspective, the IRR on a bond's cash flows is the yield to maturity (YTM).

Accepted Answer

A) True 
 B)False

Question 11

Since retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is

Accepted Answer

A)  less than the cost of new common stock equity. 
B)  equal to the cost of new common stock equity. 
C)  greater than the cost of new common stock equity. 
D)  not related to the cost of new common stock equity. 
A)  less than the cost of new common stock equity. 
B)  equal to the cost of new common stock equity. 
C)  greater than the cost of new common stock equity. 
D)  not related to the cost of new common stock equity.

Question 12

Since retained earnings is a more expensive source of financing than debt and preferred stock, the weighted average cost of capital will fall once retained earnings have been exhausted.

Accepted Answer

A) True 
 B)False

Question 13

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 cost of a new issue of common stock is ________. (See Table 9.2)

Accepted Answer

A)  10.2 percent 
B)  14.3 percent 
C)  16.7 percent 
D)  17.0 percent 
A)  10.2 percent 
B)  14.3 percent 
C)  16.7 percent 
D)  17.0 percent

Question 14

When the net proceeds from sale of a bond equal its par value, the before-tax cost would just equal the coupon interest rate.

Accepted Answer

A) True 
 B)False

Question 15

The approximate after-tax cost of debt for a 20-year, 7 percent, $1,000 par value bond selling at $960 (assume a marginal tax rate of 40 percent) is

Accepted Answer

A)  4.41 percent. 
B)  5.15 percent. 
C)  7 percent. 
D)  7.35 percent. 
A)  4.41 percent. 
B)  5.15 percent. 
C)  7 percent. 
D)  7.35 percent.

Question 16

The cost of new common stock equity for Tangshan Mining would be 17.60 percent if the firm just paid a dividend of $4.00, the stock price is $50.00, dividends are expected to grow at 8 percent indefinitely, and flotation costs are $5.00 per share.

Accepted Answer

A) True 
 B)False

Question 17

A firm has determined it can issue preferred stock at $115 per share par value. The stock will pay a $12 annual dividend. The cost of issuing and selling the stock is $3 per share. The cost of the preferred stock is

Accepted Answer

A)  6.4 percent. 
B)  10.4 percent. 
C)  10.7 percent. 
D)  12 percent. 
A)  6.4 percent. 
B)  10.4 percent. 
C)  10.7 percent. 
D)  12 percent.

Question 18

The cost to a corporation of each type of capital is dependent upon

Accepted Answer

A)  the risk-free rate of bonds plus the business risk of the firm. 
B)  the risk-free rate of each type of capital plus the business risk of the firm. 
C)  the risk-free rate of each type of capital plus the financial risk of the firm. 
D)  the risk-free rate of each type of capital plus the business risk and the financial risk of the firm. 
A)  the risk-free rate of bonds plus the business risk of the firm. 
B)  the risk-free rate of each type of capital plus the business risk of the firm. 
C)  the risk-free rate of each type of capital plus the financial risk of the firm. 
D)  the risk-free rate of each type of capital plus the business risk and the financial risk of the firm.

Question 19

One major expense associated with issuing new shares of common stock is

Accepted Answer

A)  underwriting fees. 
B)  legal fees. 
C)  registration fees. 
D)  underpricing. 
A)  underwriting fees. 
B)  legal fees. 
C)  registration fees. 
D)  underpricing.

Question 20

From a bond issuer's perspective, the IRR on a bond's cash flows is its yield to maturity (YTM); from the investor's perspective, the IRR on a bond's cash flows is the cost to maturity.

Accepted Answer

A) True 
 B)False

The ________ is the firm's desired optimal mix of debt and equity financing.

Tangshan Mining is considering issuing preferred stock. The preferred stock would have a par value of $75, and a 5.50 percent dividend. What is the cost of preferred stock for Tangshan if flotation costs would amount to 5.5 percent of par value?

In calculating the cost of common stock equity

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

The approximate before-tax cost of debt for a 15-year, 10 percent, $1,000 par value bond selling at $950 is

The cost of capital acts as a major link between the firm's long-term investment decisions and the wealth of the owners as determined by investors in the marketplace.

A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of the preferred stock is

From a bond issuer's perspective, the IRR on a bond's cash flows is its cost to maturity; from the investor's perspective, the IRR on a bond's cash flows is the yield to maturity (YTM).

Since retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is

Since retained earnings is a more expensive source of financing than debt and preferred stock, the weighted average cost of capital will fall once retained earnings have been exhausted.

When the net proceeds from sale of a bond equal its par value, the before-tax cost would just equal the coupon interest rate.

The approximate after-tax cost of debt for a 20-year, 7 percent, $1,000 par value bond selling at $960 (assume a marginal tax rate of 40 percent) is

The cost of new common stock equity for Tangshan Mining would be 17.60 percent if the firm just paid a dividend of $4.00, the stock price is $50.00, dividends are expected to grow at 8 percent indefinitely, and flotation costs are $5.00 per share.

A firm has determined it can issue preferred stock at $115 per share par value. The stock will pay a $12 annual dividend. The cost of issuing and selling the stock is $3 per share. The cost of the preferred stock is

The cost to a corporation of each type of capital is dependent upon

One major expense associated with issuing new shares of common stock is

From a bond issuer's perspective, the IRR on a bond's cash flows is its yield to maturity (YTM); from the investor's perspective, the IRR on a bond's cash flows is the cost to maturity.

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

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Exam 9: The Cost of Capital

The ________ is the firm's desired optimal mix of debt and equity financing.

Tangshan Mining is considering issuing preferred stock. The preferred stock would have a par value of $75, and a 5.50 percent dividend. What is the cost of preferred stock for Tangshan if flotation costs would amount to 5.5 percent of par value?

In calculating the cost of common stock equity

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

The approximate before-tax cost of debt for a 15-year, 10 percent, $1,000 par value bond selling at $950 is

The cost of capital acts as a major link between the firm's long-term investment decisions and the wealth of the owners as determined by investors in the marketplace.

A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of the preferred stock is

From a bond issuer's perspective, the IRR on a bond's cash flows is its cost to maturity; from the investor's perspective, the IRR on a bond's cash flows is the yield to maturity (YTM).

Since retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is

Since retained earnings is a more expensive source of financing than debt and preferred stock, the weighted average cost of capital will fall once retained earnings have been exhausted.

When the net proceeds from sale of a bond equal its par value, the before-tax cost would just equal the coupon interest rate.

The approximate after-tax cost of debt for a 20-year, 7 percent, $1,000 par value bond selling at $960 (assume a marginal tax rate of 40 percent) is

The cost of new common stock equity for Tangshan Mining would be 17.60 percent if the firm just paid a dividend of $4.00, the stock price is $50.00, dividends are expected to grow at 8 percent indefinitely, and flotation costs are $5.00 per share.

A firm has determined it can issue preferred stock at $115 per share par value. The stock will pay a $12 annual dividend. The cost of issuing and selling the stock is $3 per share. The cost of the preferred stock is

The cost to a corporation of each type of capital is dependent upon

One major expense associated with issuing new shares of common stock is

From a bond issuer's perspective, the IRR on a bond's cash flows is its yield to maturity (YTM); from the investor's perspective, the IRR on a bond's cash flows is the cost to maturity.

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