Question 1

Apple computers has raised all its capital via equity rather than debt.Such a firm is also referred to as a(n)________ firm.

Accepted Answer

A) levered 
B) margined 
C) risk less 
D) unlevered 
E) risky 
A) levered 
B) margined 
C) risk less 
D) unlevered 
E) risky

Question 2

Different divisions with differing lines of business use different costs of capital because their cost of ________ could be different.

Accepted Answer

A) debt 
B) equity 
C) capital 
D) assets 
E) common stock capital 
A) debt 
B) equity 
C) capital 
D) assets 
E) common stock capital

Question 3

Manitou Inc has preferred stock paying an annual dividend of $2.25,and common stock paying an annual dividend of $0.85.If the current preferred stock price is $18.75,what is Manitou's cost of preferred stock capital?

Accepted Answer

A) 11% 
B) 12% 
C) 4.5% 
D) 10% 
E) 13% 
A) 11% 
B) 12% 
C) 4.5% 
D) 10% 
E) 13%

Question 4

A firm has outstanding debt paying annual coupons,with a coupon rate of 5%,and 10 years to maturity.The firm's bonds are currently trading at a price of $950 per $1000 face value.What is the firm's cost of debt if it has a tax rate of 15%?

Accepted Answer

A) 5.7% 
B) 5% 
C) 4.8% 
D) 4.25% 
E) 5.4% 
A) 5.7% 
B) 5% 
C) 4.8% 
D) 4.25% 
E) 5.4%

Question 5

Leverage is the amount of ________ on a firm's balance sheet.

Accepted Answer

A) equity 
B) debt 
C) preferred stock 
D) assets 
E) liabilities 
A) equity 
B) debt 
C) preferred stock 
D) assets 
E) liabilities

Question 6

A firm is considering acquiring a competitor.The firm plans on offering $200 million for the competitor.The firm will need to issue new debt and equity to finance the acquisition.You estimate the issuance costs to be $10 million.The acquisition will generate an incremental free cash flow of $25 million in the first year and this cash flow is expected to grow at an annual rate of 3% forever.If the firm's WACC is 13%,what is the value of this project?

Accepted Answer

A) $40 million 
B) $50 million 
C) $60 million 
D) $70 million 
E) $80 million 
A) $40 million 
B) $50 million 
C) $60 million 
D) $70 million 
E) $80 million

Question 7

Starling Capital has outstanding corporate debt paying a 10% coupon,with a current yield to maturity of 8%.If Starling's tax rate is 35%,what is the firm's effective cost of debt?

Accepted Answer

A) 5.2% 
B) 6.5% 
C) 10% 
D) 8% 
E) 5.85% 
A) 5.2% 
B) 6.5% 
C) 10% 
D) 8% 
E) 5.85%

Question 8

A firm has $1 million market value and it sells preferred stock with a par value of $100.If the coupon rate on the preferred stock is 7% and the preferred stock trades at $95,what is the cost of preferred stock financing?

Accepted Answer

A) 6.75% 
B) 7.15% 
C) 7.21% 
D) 7.37% 
E) 8.12% 
A) 6.75% 
B) 7.15% 
C) 7.21% 
D) 7.37% 
E) 8.12%

Question 9

SAP Inc.received a $1.5 million grant under its Small Business Innovation program.SAP invested the grant money and developed a system to remove metal contaminants from storm water in shipyards.The firm estimates that each shipyard spends $400,000 a year on storm water clean-up efforts.If SAP is able to sign up and retain four shipyards in the first year onwards,what is the present value (PV)of the project (net of investment)if the cost of capital for SAP is 16% per year? Assume a cost of operations and other costs for SAP equal 60% of revenue.

Accepted Answer

A) $1.9 million 
B) $2.1 million 
C) $2.3 million 
D) $2.5 million 
E) $3.1 million 
A) $1.9 million 
B) $2.1 million 
C) $2.3 million 
D) $2.5 million 
E) $3.1 million

Question 10

Firms that have many divisions with different lines of business do not use a company-wide WACC to evaluate projects.

Accepted Answer

A) True 
 B)False

Question 11

Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital.Its current capital structure has a 20% weight in equity,10% in preferred stock,and 70% in debt.The cost of equity capital is 14%,the cost of preferred stock is 10%,and the pretax cost of debt is 9%.What is the weighted average cost of capital for Ford if its marginal tax rate is 30%?

Accepted Answer

A) 7.87% 
B) 8.21% 
C) 8.89% 
D) 9.21% 
E) 10.14% 
A) 7.87% 
B) 8.21% 
C) 8.89% 
D) 9.21% 
E) 10.14%

Question 12

A firm has $30 million of common stock,$20 million of preferred stock,and $40 million of debt.The cost of equity is 8.5%,the cost of preferred stock is 9.5%,and the pretax cost of debt is 7%.If the firm's tax rate is 30%,what is the firm's WACC?

Accepted Answer

A) 8.33% 
B) 6.44% 
C) 7.12% 
D) 8.06% 
E) 7.75% 
A) 8.33% 
B) 6.44% 
C) 7.12% 
D) 8.06% 
E) 7.75%

Question 13

As a firm increases its level of debt relative to its level of equity,the firm is:

Accepted Answer

A) increasing the fraction of the firm financed with equity. 
B) decreasing the fraction of the firm financed with debt. 
C) decreasing its leverage. 
D) increasing its leverage. 
E) becoming unlevered. 
A) increasing the fraction of the firm financed with equity. 
B) decreasing the fraction of the firm financed with debt. 
C) decreasing its leverage. 
D) increasing its leverage. 
E) becoming unlevered.

Question 14

Why do we use market values rather than book values in calculation of WACC?

Accepted Answer

We use market values rather th

Question 15

The fact that the after-tax cost of debt is lower than the pretax cost of debt implicitly assumes that interest expense can be:

Accepted Answer

A) deducted. 
B) margined. 
C) refinanced. 
D) salvaged. 
E) ignored. 
A) deducted. 
B) margined. 
C) refinanced. 
D) salvaged. 
E) ignored.

Question 16

Bombardier Inc has common stock trading at a price of $15,and a market capitalization of $8 billion.The firm also has preferred stock worth a total of $2 billion,currently trading at $23 per share and paying a dividend of $2.75 per share.The firm's beta is 0.93,the risk-free rate is 3.2%,and the market risk premium is 7%.The firm has $12 billion of debt with a yield to maturity of 5%.If the firm's tax rate is 20%,what is Bombardier's WACC?

Accepted Answer

A) 4.12% 
B) 6.8% 
C) 8.56% 
D) 7.3% 
E) 7.57% 
A) 4.12% 
B) 6.8% 
C) 8.56% 
D) 7.3% 
E) 7.57%

Question 17

The fact that the interest paid on debt is a tax-deductible expense increases the cost of debt financing.

Accepted Answer

A) True 
 B)False

Question 18

Is it incorrect to use the coupon rate of debt toward cost of debt?

Accepted Answer

Yes,it is inaccurate to use th

Question 19

A firm incurs $50,000 in interest expenses each year.If the tax rate of the firm is 30%,what is the effective after-tax interest rate expense for the firm?

Accepted Answer

A) $27,000 
B) $29,000 
C) $32,000 
D) $35,000 
E) $39,000 
A) $27,000 
B) $29,000 
C) $32,000 
D) $35,000 
E) $39,000

Question 20

A firm's cost of debt is the rate of interest it would have to pay to refinance its existing debt.

Accepted Answer

A) True 
 B)False

Exam 12: Determining the Cost of Capital

Apple computers has raised all its capital via equity rather than debt.Such a firm is also referred to as a(n)________ firm.

Different divisions with differing lines of business use different costs of capital because their cost of ________ could be different.

Manitou Inc has preferred stock paying an annual dividend of $2.25,and common stock paying an annual dividend of $0.85.If the current preferred stock price is $18.75,what is Manitou's cost of preferred stock capital?

A firm has outstanding debt paying annual coupons,with a coupon rate of 5%,and 10 years to maturity.The firm's bonds are currently trading at a price of $950 per $1000 face value.What is the firm's cost of debt if it has a tax rate of 15%?

Leverage is the amount of ________ on a firm's balance sheet.

Starling Capital has outstanding corporate debt paying a 10% coupon,with a current yield to maturity of 8%.If Starling's tax rate is 35%,what is the firm's effective cost of debt?

A firm has $1 million market value and it sells preferred stock with a par value of $100.If the coupon rate on the preferred stock is 7% and the preferred stock trades at $95,what is the cost of preferred stock financing?

Firms that have many divisions with different lines of business do not use a company-wide WACC to evaluate projects.

A firm has $30 million of common stock,$20 million of preferred stock,and $40 million of debt.The cost of equity is 8.5%,the cost of preferred stock is 9.5%,and the pretax cost of debt is 7%.If the firm's tax rate is 30%,what is the firm's WACC?

As a firm increases its level of debt relative to its level of equity,the firm is:

Why do we use market values rather than book values in calculation of WACC?

The fact that the after-tax cost of debt is lower than the pretax cost of debt implicitly assumes that interest expense can be:

The fact that the interest paid on debt is a tax-deductible expense increases the cost of debt financing.

Is it incorrect to use the coupon rate of debt toward cost of debt?

A firm incurs $50,000 in interest expenses each year.If the tax rate of the firm is 30%,what is the effective after-tax interest rate expense for the firm?

A firm's cost of debt is the rate of interest it would have to pay to refinance its existing debt.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters