Question 1

Rose has preferred stock selling for 99 percent of par that pays a 9 percent annual coupon.What would be Rose's component cost of preferred stock?

Accepted Answer

A) 4.55 percent 
B) 8.91 percent 
C) 9.00 percent 
D) 9.09 percent

Question 2

Which of these makes this a true statement? The WACC formula:

Accepted Answer

A) is not impacted by taxes. 
B) uses the after-tax costs of capital to compute the firm's weighted average cost of debt financing. 
C) uses the pre-tax costs of capital to compute the firm's weighted average cost of debt financing. 
D) focuses on operating costs only to keep them separate from financing costs.

Question 3

Which of the following statements is true?

Accepted Answer

A) If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital. 
B) If the new project is riskier than the firm's existing projects, then it should be charged a lower cost of capital. 
C) If the new project is riskier than the firm's existing projects, then it should be charged the firm's cost of capital. 
D) The new project's risk is not a factor in determining its cost of capital.

Question 4

Sea Shell Industries has 50 million shares of common stock outstanding,10 million shares of preferred stock outstanding,and 100 thousand bonds.If the common shares are selling for $19 per share,the preferred shares are selling for $8.50 per share,and the bonds are selling for 97 percent of par ($1,000),what would be the weights used in the calculation of Sea Shell's WACC for common stock,preferred stock,and bonds,respectively?

Accepted Answer

A) 33.33 percent, 33.33 percent, 33.33 percent 
B) 83.19 percent, 16.64 percent, 0.17 percent 
C) 15.26 percent, 6.83 percent, 77.91 percent 
D) 82.92 percent, 7.51 percent, 8.57 percent

Question 5

CJ Co.stock has a beta of 0.9,the current risk-free rate is 5.6,and the expected return on the market is 13 percent.What is CJ Co's cost of equity?

Accepted Answer

A) 12.26 percent 
B) 17.30 percent 
C) 19.50 percent 
D) 22.34 percent

Question 6

An average of which of the following will give a fairly accurate estimate of what a project's beta will be?

Accepted Answer

A) Flotation beta 
B) Proxy beta 
C) Pure-play proxies 
D) Weighted average beta

Question 7

Suppose that Glamour Nails,Inc.'s capital structure features 30 percent equity,70 percent debt,and that its before-tax cost of debt is 4 percent,while its cost of equity is 10 percent.If the appropriate weighted average tax rate is 34 percent,what will be Glamour Nails' WACC?

Accepted Answer

A) 4.78 percent 
B) 4.85 percent 
C) 5.80 percent 
D) 7.00 percent

Question 8

Suppose that Beach Blanket's common shares sell for $55 per share,are expected to set their next annual dividend at $3.00 per share,and that all future dividends are expected to grow by 8 percent per year,indefinitely.If Beach faces a flotation cost of 10 percent on new equity issues,what will be the flotation-adjusted cost of equity?

Accepted Answer

A) 5.45 percent 
B) 8.06 percent 
C) 13.45 percent 
D) 14.06 percent

Question 9

Differentiate between the objective and subjective approach to computing a divisional cost of capital.

Accepted Answer

The answer of Differentiate between the objective and subjective approach...

Question 10

JackITs has 5 million shares of common stock outstanding,1 million shares of preferred stock outstanding,and 20 thousand bonds.If the common shares are selling for $28 per share,the preferred share are selling for $13.50 per share,and the bonds are selling for 98 percent of par,what would be the weight used for equity in the computation of JackITs' WACC?

Accepted Answer

A) 33.33 percent 
B) 80.88 percent 
C) 83.08 percent 
D) 91.19 percent

Question 11

Explain why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division.

Accepted Answer

The answer of Explain why the divisional cost of capital...

Question 12

ADK Industries common shares sell for $60 per share.ADK expects to set their next annual dividend at $3.75 per share.If ADK expects future dividends to grow at 9 percent per year,indefinitely,the current risk-free rate is 4 percent,the expected rate on the market is 11 percent,and the stock has a beta of 1.5,what should be the best estimate of the firm's cost of equity?

Accepted Answer

A) 15.25 percent 
B) 14.50 percent 
C) 14.88 percent 
D) 15.03 percent

Question 13

IVY has preferred stock selling for 98 percent of par that pays a 7 percent annual coupon.What would be IVY's component cost of preferred stock?

Accepted Answer

A) 6.86 percent 
B) 7.00 percent 
C) 7.14 percent 
D) 14.00 percent

Question 14

Which of the following is a true statement regarding the appropriate tax rate to be used in the WACC?

Accepted Answer

A) One would use the marginal tax rate that the firm paid the prior year. 
B) One would use the average tax rate that the firm paid the prior year. 
C) One would use the weighted average of the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction. 
D) One would use the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction.

Question 15

Which of the following statements is correct?

Accepted Answer

A) The WACC is a measure of the before-tax cost of capital. 
B) The WACC measures the marginal cost of capital. 
C) It is common that the after-tax cost of debt exceeds the cost of equity. 
D) None of these statements is correct.

Question 16

The ____________ approach to computing a divisional weighted average cost of capital (WACC)requires only that WACCs for "risky" and "relatively safe" divisions be adjusted.

Accepted Answer

A) subjective 
B) objective 
C) firmwide 
D) implicit

Question 17

Pumpkin Pie Industries has 5 million shares of common stock outstanding,1 million shares of preferred stock outstanding,and 10 thousand bonds.If the common shares are selling for $50 per share,the preferred shares are selling for $31 per share,and the bonds are selling for 98 percent of par ($1,000),what would be the weights used in the calculation of Pumpkin Pie's WACC for common stock,preferred stock,and bonds,respectively?

Accepted Answer

A) 33.33 percent, 33.33 percent, 33.33 percent 
B) 83.19 percent, 16.64 percent, 0.17 percent 
C) 85.97 percent, 10.67 percent, 3.38 percent 
D) 27.93 percent, 17.32 percent, 54.75 percent

Question 18

Why do we use market-value weights instead of book-value weights?

Accepted Answer

A) Because firms often "window-dress" their financial statements. 
B) Because we are interested in determining what the cost of financing the firm's assets would be given today's market situation and the component costs the firm currently faces, not what the historical prices would have been. 
C) Because it is required in the Sarbanes-Oxley regulations. 
D) None of these answers is correct.

Question 19

Denote the impact that flotation costs have on capital budgeting decisions.

Accepted Answer

The answer of Denote the impact that flotation costs have...

Question 20

An all-equity firm is considering the projects shown as follows.The T-bill rate is 4 percent and the market risk premium is 7 percent.If the firm uses its current WACC of 12 percent to evaluate these projects,which project(s),if any,will be incorrectly accepted or rejected?

Accepted Answer

A) Project A would be incorrectly rejected. 
B) Both Projects A and C would be incorrectly rejected. 
C) Project A will be incorrectly rejected and Project B would be incorrectly accepted. 
D) None of the projects will be incorrectly accepted or rejecteD.Step 1: Find Project Required Returns using CAPM.Project A: 8.2 percent; Project B: 12.4 percent; Project C: 13.8 percent; Project D: 14.5 percent; Project A would be incorrectly rejected since its required return is only 8.2 percent given its risk and it is expected to return 9 percent.Project C would be incorrectly accepted since it should earn 13.8 percent given its risk.

Exam 11: Calculating the Cost of Capital