Question 1

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% E

Question 2

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. B

Question 3

When calculating the WACC,it is standard practice to subtract ________ to compute the net debt outstanding.

Accepted Answer

A)   equity
B)   dividends
C)   cash and risk-free securities
D)   coupons
E)   risk-free interest rate C

Question 4

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

Question 5

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%

Question 6

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%

Question 7

A levered firm is one that has ________ outstanding.

Accepted Answer

A)   debt
B)   equity
C)   preferred stock
D)   equity options
E)   accounts receivable

Question 8

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 answer of Between the two models Constant Dividend Growth...

Question 9

Assume JUP has debt with a book value of $20 million,trading at 120% of par value.The firm has book equity of $20 million,and 2 million shares trading at $18 per share.What weights should JUP use in calculating its WACC?

Accepted Answer

A)   40% for debt, 60% for equity
B)   50% for debt, 50% for equity
C)   36% for debt, 64%% for equity
D)   45% for debt, 55% for equity
E)   30% for debt, 70% for equity

Question 10

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

Question 11

The costs of external financing must be deducted from the net present value (NPV)of a project to evaluate if it is worth undertaking.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

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

Question 13

An all-equity firm produced a dividend flow of $40,000 last year.The market value of the firm is $800,000 and the dividend is expected to increase at 5% each year.What is the cost of equity capital for this firm?

Accepted Answer

A)   9.18%
B)   9.75%
C)   10.25%
D)   11.89%
E)   12.05%

Question 14

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

Question 15

Bell Media has common stock trading at a price of $74,and a market capitalization of $23 billion.The firm also has preferred stock worth a total of $6 billion,currently trading at $54 per share and paying a dividend of $4.50 per share.The firm's beta is 1.2,the risk-free rate is 2.4%,and the market risk premium is 6%.The firm has $28 billion of debt with a yield to maturity of 4%.If the firm's tax rate is 30%,what is Bell's WACC?

Accepted Answer

A)   6.41%
B)   7.19%
C)   6.61%
D)   7.31%
E)   7.71%

Question 16

The outstanding debt of Berstin Corp.has ten years to maturity,a current yield of 7%,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)   4.9%
B)   6.5%
C)   7.0%
D)   7.37%
E)   8.15%

Question 17

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 18

Many financial managers use market risk premiums that are closer to 5%,which is lower than historical averages,because investors require a ________ risk premium for holding risky securities than in the past.

Accepted Answer

A)   lower
B)   higher
C)   similar
D)   specific
E)   consistent

Question 19

One should use accounting-based book values rather than market values of debt and equity to determine the weights for the different sources of capital.

Accepted Answer

A) True 
 B)False

Question 20

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%

Exam 12: Determining the Cost of Capital

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

When calculating the WACC,it is standard practice to subtract ________ to compute the net debt outstanding.

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?

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?

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?

A levered firm is one that has ________ outstanding.

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?

Assume JUP has debt with a book value of $20 million,trading at 120% of par value.The firm has book equity of $20 million,and 2 million shares trading at $18 per share.What weights should JUP use in calculating its 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?

The costs of external financing must be deducted from the net present value (NPV)of a project to evaluate if it is worth undertaking.

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

An all-equity firm produced a dividend flow of $40,000 last year.The market value of the firm is $800,000 and the dividend is expected to increase at 5% each year.What is the cost of equity capital for this firm?

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

The outstanding debt of Berstin Corp.has ten years to maturity,a current yield of 7%,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%.

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

Many financial managers use market risk premiums that are closer to 5%,which is lower than historical averages,because investors require a ________ risk premium for holding risky securities than in the past.

One should use accounting-based book values rather than market values of debt and equity to determine the weights for the different sources of capital.

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?