Question 1

When discussing weighing schemes for calculating the weighted average cost of capital, the preferences can be stated as

Accepted Answer

A)  market value weights are preferred over book value weights and target weights are preferred over historic weights. 
B)  book value weights are preferred over market value weights and target weights are preferred over historic weights. 
C)  book value weights are preferred over market value weights and historic weights are preferred over target weights. 
D)  market value weights are preferred over book value weights and historic weights are preferred over target weights. 
A)  market value weights are preferred over book value weights and target weights are preferred over historic weights. 
B)  book value weights are preferred over market value weights and target weights are preferred over historic weights. 
C)  book value weights are preferred over market value weights and historic weights are preferred over target weights. 
D)  market value weights are preferred over book value weights and historic weights are preferred over target weights.

Question 2

The ________ from the sale of a security are the funds actually received from the sale after ________, or the total costs of issuing and selling the security, which have been subtracted from the total proceeds.

Accepted Answer

A)  gross proceeds; the after-tax costs 
B)  gross proceeds; the flotation costs 
C)  net proceeds; the flotation costs 
D)  net proceeds; the after-tax costs 
A)  gross proceeds; the after-tax costs 
B)  gross proceeds; the flotation costs 
C)  net proceeds; the flotation costs 
D)  net proceeds; the after-tax costs

Question 3

The cost of retained earnings 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 4

Circumstances in which the constant growth valuation modelthe Gordon modelfor estimating the value of a share of stock should be used include

Accepted Answer

A)  declining dividends. 
B)  an erratic dividend stream. 
C)  the lack of dividends. 
D)  a steady growth rate in dividends. 
A)  declining dividends. 
B)  an erratic dividend stream. 
C)  the lack of dividends. 
D)  a steady growth rate in dividends.

Question 5

The cost of capital reflects the cost of funds

Accepted Answer

A)  over a short-run time period. 
B)  at a given point in time. 
C)  over a long-run time period. 
D)  at current book values. 
A)  over a short-run time period. 
B)  at a given point in time. 
C)  over a long-run time period. 
D)  at current book values.

Question 6

The cost of retained earnings for Tangshan Mining would be 16.64 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 7

Firms typically raise long-term funds

Accepted Answer

A)  only at the inception of the firm. 
B)  on a continuous basis. 
C)  in lump sums as needed. 
D)  in proportion to the capital mixture of the target capital structure. 
A)  only at the inception of the firm. 
B)  on a continuous basis. 
C)  in lump sums as needed. 
D)  in proportion to the capital mixture of the target capital structure.

Question 8

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 preferred stock is ________. (See Table 9.1)

Accepted Answer

A)  7.2 percent 
B)  8.3 percent 
C)  13.3 percent 
D)  13.9 percent 
A)  7.2 percent 
B)  8.3 percent 
C)  13.3 percent 
D)  13.9 percent

Question 9

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 before-tax cost of debt is ________. (See Table 9.1)

Accepted Answer

A)  7.7 percent 
B)  10.6 percent 
C)  11.2 percent 
D)  12.7 percent 
A)  7.7 percent 
B)  10.6 percent 
C)  11.2 percent 
D)  12.7 percent

Question 10

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 weighted average cost of capital up to the point when retained earnings are exhausted is ________. (See Table 9.1)

Accepted Answer

A)  7.5 percent 
B)  8.65 percent 
C)  10.4 percent 
D)  11.0 percent 
A)  7.5 percent 
B)  8.65 percent 
C)  10.4 percent 
D)  11.0 percent

Question 11

Holding risk constant, the implementation of projects with a rate of return above the cost of capital will decrease the value of the firm, and vice versa.

Accepted Answer

A) True 
 B)False

Question 12

Table 9.3
Balance Sheet
General Talc Mines
December 31, 2003  
-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 20-year, $1,000 par value, 9 percent bond for $980. A flotation cost of 2 percent of the face value would be required in addition to the discount of $20.
Preferred Stock: The firm has determined it can issue preferred stock at $65 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: The firm's common stock is currently selling for $40 per share. The dividend expected to be paid at the end of the coming year is $5.07. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.45. It is expected that to sell, a new common stock issue must be underpriced at $1 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm's marginal tax rate is 40 percent.
Calculate the firm's weighted average cost of capital assuming the firm has exhausted all retained earnings.

Accepted Answer

r_i = 5.6% r_p = 12.9% r

Question 13

In computing the cost of retained earnings, the net proceeds represents the amount of money retained net of any underpricing and/or flotation costs.

Accepted Answer

A) True 
 B)False

Question 14

The cost of each type of capital depends on the

Accepted Answer

A)  risk-free cost of that type of funds. 
B)  business risk of the firm. 
C)  financial risk of the firm. 
D)  all of the above. 
A)  risk-free cost of that type of funds. 
B)  business risk of the firm. 
C)  financial risk of the firm. 
D)  all of the above.

Question 15

Nico Trading Corporation is considering issuing long-term debt. The debt would have a 30 year maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm's tax rate is 35 percent. Given this information, the after tax cost of debt for Nico Trading would be 7.26 percent.

Accepted Answer

A) True 
 B)False

Question 16

The cost of common stock equity may be estimated by using the

Accepted Answer

A)  yield curve. 
B)  capital asset pricing model. 
C)  internal rate of return. 
D)  DuPont analysis. 
A)  yield curve. 
B)  capital asset pricing model. 
C)  internal rate of return. 
D)  DuPont analysis.

Question 17

In calculating the cost of common stock equity, the model having the stronger theoretical foundation is

Accepted Answer

A)  the constant growth model. 
B)  the Gordon model. 
C)  the variable growth model. 
D)  the capital asset pricing model. 
A)  the constant growth model. 
B)  the Gordon model. 
C)  the variable growth model. 
D)  the capital asset pricing model.

When discussing weighing schemes for calculating the weighted average cost of capital, the preferences can be stated as

The from the sale of a security are the funds actually received from the sale after , or the total costs of issuing and selling the security, which have been subtracted from the total proceeds.

The cost of retained earnings 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.

Circumstances in which the constant growth valuation modelthe Gordon modelfor estimating the value of a share of stock should be used include

The cost of capital reflects the cost of funds

The cost of retained earnings for Tangshan Mining would be 16.64 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.

Firms typically raise long-term funds

Holding risk constant, the implementation of projects with a rate of return above the cost of capital will decrease the value of the firm, and vice versa.

In computing the cost of retained earnings, the net proceeds represents the amount of money retained net of any underpricing and/or flotation costs.

The cost of each type of capital depends on the

The cost of common stock equity may be estimated by using the

In calculating the cost of common stock equity, the model having the stronger theoretical foundation is

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

When discussing weighing schemes for calculating the weighted average cost of capital, the preferences can be stated as

The ________ from the sale of a security are the funds actually received from the sale after ________, or the total costs of issuing and selling the security, which have been subtracted from the total proceeds.

The cost of retained earnings 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.

Circumstances in which the constant growth valuation modelthe Gordon modelfor estimating the value of a share of stock should be used include

The cost of capital reflects the cost of funds

The cost of retained earnings for Tangshan Mining would be 16.64 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.

Firms typically raise long-term funds

Holding risk constant, the implementation of projects with a rate of return above the cost of capital will decrease the value of the firm, and vice versa.

In computing the cost of retained earnings, the net proceeds represents the amount of money retained net of any underpricing and/or flotation costs.

The cost of each type of capital depends on the

The cost of common stock equity may be estimated by using the

In calculating the cost of common stock equity, the model having the stronger theoretical foundation is

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

The from the sale of a security are the funds actually received from the sale after , or the total costs of issuing and selling the security, which have been subtracted from the total proceeds.