Question 1

Financial managers do not need to use all sources of financing in order to determine the cost of capital.

Accepted Answer

A) True 
 B)False

Question 2

Xcom Industries will pay a dividend of $0.44 next year,and expects its dividends to grow at 8% per year.The current price of Xom stock is $6.45 per share.What is Xom's cost of equity?

Accepted Answer

A) 17% 
B) 14.8% 
C) 6.8% 
D) 7.4% 
E) 15.4% 
A) 17% 
B) 14.8% 
C) 6.8% 
D) 7.4% 
E) 15.4%

Question 3

Should a firm with high retained earnings have a lower cost of equity?

Accepted Answer

Cost of equity is the return t

Question 4

Between the two models Constant Dividend Growth Model (CDGM)and Capital Asset Pricing Model (CAPM),which is a better method for computation of the cost of equity?

Accepted Answer

The Capital Asset Pricing Model (CAPM)is

Question 5

A firm is considering investing in a new project with an upfront cost of $400 million.The project will generate an incremental free cash flow of $50 million in the first year and this cash flow is expected to grow at an annual rate of 4% forever.If the firm's WACC is 13%,what is the value of this project?

Accepted Answer

A) $155.6 million 
B) $555.6 million 
C) $577.8 million 
D) $177.8 million 
E) $181.4 million 
A) $155.6 million 
B) $555.6 million 
C) $577.8 million 
D) $177.8 million 
E) $181.4 million

Question 6

The outstanding debt of Berstin Corp.has five years to maturity,a current yield of 6%,and a price of $95.Assume the debt has a face value of $100.What is the pretax cost of debt if the tax rate is 30%?

Accepted Answer

A) 4.2% 
B) 4.8% 
C) 6.9% 
D) 7.3% 
E) 7.7% 
A) 4.2% 
B) 4.8% 
C) 6.9% 
D) 7.3% 
E) 7.7%

Question 7

Shaw Communications is currently financed with 30% equity,10% preferred stock,and 60% debt.It has a cost of equity capital of 11%,a cost of preferred stock of 7.5%,and its pretax cost of debt is 6%.If the firm has a tax rate of 30%,what is Shaw's WACC?

Accepted Answer

A) 7.57% 
B) 8.17% 
C) 5.82% 
D) 6.57% 
E) 7.65% 
A) 7.57% 
B) 8.17% 
C) 5.82% 
D) 6.57% 
E) 7.65%

Question 8

For an unlevered firm,the cost of capital of the firm can be determined by using the:

Accepted Answer

A) yield on the traded debt. 
B) Capital Asset Pricing Model. 
C) dividend yield. 
D) preferred stock yield. 
E) market value of equity. 
A) yield on the traded debt. 
B) Capital Asset Pricing Model. 
C) dividend yield. 
D) preferred stock yield. 
E) market value of equity.

Question 9

Rogers Communications is currently financed with 60% equity,20% preferred stock,and 20% debt.It has a cost of equity capital of 8.5%,a cost of preferred stock of 6%,and its pretax cost of debt is 7%.If the firm has a tax rate of 25%,what is Rogers's WACC?

Accepted Answer

A) 7.04% 
B) 6.58% 
C) 7.17% 
D) 7.7% 
E) 7.35% 
A) 7.04% 
B) 6.58% 
C) 7.17% 
D) 7.7% 
E) 7.35%

Question 10

The WACC does not depend on the risk of a company's line of business.

Accepted Answer

A) True 
 B)False

Question 11

GM has a market value of $8 billion of equity and a market value of $12 billion of debt.What are the weights in equity and debt that are used for calculating the WACC?

Accepted Answer

A) 0.5,0.5 
B) 0.6,0.4 
C) 0.4,0.6 
D) 0.8,0.2 
E) 0.8,1.2 
A) 0.5,0.5 
B) 0.6,0.4 
C) 0.4,0.6 
D) 0.8,0.2 
E) 0.8,1.2

Question 12

New Flyer Industries has decided to expand its production of hybrid transit buses.The firm expects incremental cash flows of $40 million per year for the next 10 years.The upfront cost of the expansion is $150 million,and there are additional issuance costs for external financing of $15 million.If the New Flyer's WACC is 7.5%,what is the NPV of the project?

Accepted Answer

A) $235 million 
B) $125 million 
C) $110 million 
D) $95 million 
E) $219 million 
A) $235 million 
B) $125 million 
C) $110 million 
D) $95 million 
E) $219 million

Question 13

Verano Inc.has two business divisions-a software product line and a waste water clean-up product line.The software business has a cost of equity capital of 12% and the waste water clean-up business has a cost of equity capital of 8%.Verano has 50% of its revenue from software and the rest from the waste water business.Verano is considering a purchase of another company in the waste water business using equity financing.What is the appropriate cost of capital to evaluate the business?

Accepted Answer

A) 12% 
B) 8% 
C) 10% 
D) 11% 
E) 6% 
A) 12% 
B) 8% 
C) 10% 
D) 11% 
E) 6%

Question 14

A firm has outstanding debt with a coupon rate of 7%,seven years maturity,and a price of $1000 per $1000 face value.What is the after-tax cost of debt if the marginal tax rate of the firm is 30%?

Accepted Answer

A) 4.9% 
B) 5.2% 
C) 5.5% 
D) 5.9% 
E) 6.3% 
A) 4.9% 
B) 5.2% 
C) 5.5% 
D) 5.9% 
E) 6.3%

Question 15

When computing the cost of capital:

Accepted Answer

A) Firms with business units having different levels of risk should calculate the cost of capital for each unit separately. 
B) It is not necessary to compute the cost of capital separately as the market risk across all units will average out. 
C) Using a single cost of capital for a firm with units with different market risks is advisable as it provides investors with a focused metric for assessing the returns they can expect. 
D) Determining the cost of capital is of secondary importance to the firm's forecast of sales growth,so a single cost of capital calculation for all business units is acceptable. 
E) Since assessing a firm's cost of capital cannot be done with a reasonable level of accuracy,calculating a separate cost for each business unit is not necessary. 
A) Firms with business units having different levels of risk should calculate the cost of capital for each unit separately. 
B) It is not necessary to compute the cost of capital separately as the market risk across all units will average out. 
C) Using a single cost of capital for a firm with units with different market risks is advisable as it provides investors with a focused metric for assessing the returns they can expect. 
D) Determining the cost of capital is of secondary importance to the firm's forecast of sales growth,so a single cost of capital calculation for all business units is acceptable. 
E) Since assessing a firm's cost of capital cannot be done with a reasonable level of accuracy,calculating a separate cost for each business unit is not necessary.

Question 16

Lululemon Athletica has a current share price of $50,and a market capitalization of $7 billion.The firm's beta is 0.27,the risk-free rate is 2.4%,and the market risk premium is 6%.The firm has $4 billion of debt with a yield to maturity of 8%.If the firm's tax rate is 35%,what is Lululemon's WACC?

Accepted Answer

A) 7.24% 
B) 4.45% 
C) 4.61% 
D) 4.71% 
E) 6.01% 
A) 7.24% 
B) 4.45% 
C) 4.61% 
D) 4.71% 
E) 6.01%

Question 17

Barley Corp has debt with a book value of $19 million,currently trading at 90% of book value.It also has book value of equity of $15 million,and 10 million shares of common stock trading at $2.45 per share.What weights should Barley Corp use for debt and equity in calculating its WACC?

Accepted Answer

A) 0.56,0.44 
B) 0.44,0.56 
C) 0.41,0.59 
D) 0.5,0.5 
E) 0.6,0.4 
A) 0.56,0.44 
B) 0.44,0.56 
C) 0.41,0.59 
D) 0.5,0.5 
E) 0.6,0.4

Question 18

A firm has $8 billion of common stock and $14 billion of debt.The cost of equity is 7.5%,and the pretax cost of debt is 3.8%.If the firm's tax rate is 30%,what is the firm's WACC?

Accepted Answer

A) 4.84% 
B) 3.6% 
C) 5.15% 
D) 4.42% 
E) 5.65% 
A) 4.84% 
B) 3.6% 
C) 5.15% 
D) 4.42% 
E) 5.65%

Question 19

Divisional costs of capital are more appropriate when evaluating a project for a line of business when the types of business in a firm are:

Accepted Answer

A) mature businesses. 
B) similar. 
C) new businesses. 
D) different. 
E) profitable. 
A) mature businesses. 
B) similar. 
C) new businesses. 
D) different. 
E) profitable.

Question 20

Power Financial Corp has a current share price of $30,and a market capitalization of $20 billion.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 Power Financial's WACC?

Accepted Answer

A) 5.43% 
B) 5.71% 
C) 7.94% 
D) 6.55% 
E) 7.57% 
A) 5.43% 
B) 5.71% 
C) 7.94% 
D) 6.55% 
E) 7.57%

Exam 12: Determining the Cost of Capital

Financial managers do not need to use all sources of financing in order to determine the cost of capital.

Xcom Industries will pay a dividend of $0.44 next year,and expects its dividends to grow at 8% per year.The current price of Xom stock is $6.45 per share.What is Xom's cost of equity?

Should a firm with high retained earnings have a lower cost of equity?

Between the two models Constant Dividend Growth Model (CDGM)and Capital Asset Pricing Model (CAPM),which is a better method for computation of the cost of equity?

The outstanding debt of Berstin Corp.has five years to maturity,a current yield of 6%,and a price of $95.Assume the debt has a face value of $100.What is the pretax cost of debt if the tax rate is 30%?

Shaw Communications is currently financed with 30% equity,10% preferred stock,and 60% debt.It has a cost of equity capital of 11%,a cost of preferred stock of 7.5%,and its pretax cost of debt is 6%.If the firm has a tax rate of 30%,what is Shaw's WACC?

For an unlevered firm,the cost of capital of the firm can be determined by using the:

Rogers Communications is currently financed with 60% equity,20% preferred stock,and 20% debt.It has a cost of equity capital of 8.5%,a cost of preferred stock of 6%,and its pretax cost of debt is 7%.If the firm has a tax rate of 25%,what is Rogers's WACC?

The WACC does not depend on the risk of a company's line of business.

GM has a market value of $8 billion of equity and a market value of $12 billion of debt.What are the weights in equity and debt that are used for calculating the WACC?

A firm has outstanding debt with a coupon rate of 7%,seven years maturity,and a price of $1000 per $1000 face value.What is the after-tax cost of debt if the marginal tax rate of the firm is 30%?

When computing the cost of capital:

Lululemon Athletica has a current share price of $50,and a market capitalization of $7 billion.The firm's beta is 0.27,the risk-free rate is 2.4%,and the market risk premium is 6%.The firm has $4 billion of debt with a yield to maturity of 8%.If the firm's tax rate is 35%,what is Lululemon's WACC?

Barley Corp has debt with a book value of $19 million,currently trading at 90% of book value.It also has book value of equity of $15 million,and 10 million shares of common stock trading at $2.45 per share.What weights should Barley Corp use for debt and equity in calculating its WACC?

A firm has $8 billion of common stock and $14 billion of debt.The cost of equity is 7.5%,and the pretax cost of debt is 3.8%.If the firm's tax rate is 30%,what is the firm's WACC?

Divisional costs of capital are more appropriate when evaluating a project for a line of business when the types of business in a firm are:

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

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