Question 1

The cost of capital is

Accepted Answer

A) the rate of return required by investors in the firm's securities 
B) the minimum rate of return required on new investments of high risk undertaken by the firm 
C) approximately 10 percent for most firms 
D) concerned with plant and equipment only 
A) the rate of return required by investors in the firm's securities 
B) the minimum rate of return required on new investments of high risk undertaken by the firm 
C) approximately 10 percent for most firms 
D) concerned with plant and equipment only

Question 2

The cost of external equity is greater than the cost of internal equity because

Accepted Answer

A) it decreases the earnings per share 
B) it increases the market price of the stock 
C) of the flotation costs 
D) dividends are increased 
A) it decreases the earnings per share 
B) it increases the market price of the stock 
C) of the flotation costs 
D) dividends are increased

Question 3

In many instances book value, rather than market value, may be used to determine the weighted average cost of capital.This is because of all of the following EXCEPT:

Accepted Answer

A) market values change daily 
B) the market prices of the various sources of capital are not easily estimated. 
C) many firms have several different issues of debt which may not be publicly held. 
D) book value is a more accurate value in determining the actual cost of capital 
A) market values change daily 
B) the market prices of the various sources of capital are not easily estimated. 
C) many firms have several different issues of debt which may not be publicly held. 
D) book value is a more accurate value in determining the actual cost of capital

Question 4

The Allegheny Valley Power Company common stock has a beta of 0.80.If the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of equity capital for the firm (using the CAPM).

Accepted Answer

A) 14.1% 
B) 7.6% 
C) 6.5% 
D) 13.0% 
A) 14.1% 
B) 7.6% 
C) 6.5% 
D) 13.0%

Question 5

Calculate the after-tax cost of preferred stock for Ohio Valley Power Company, which is planning to sell $100 million of $3.25 cumulative preferred stock to the public at a price of $25 per share.Flotation costs are $1.00 per share.Ohio Valley has a marginal income tax rate of 40%.

Accepted Answer

A) 13.0% 
B) 7.8% 
C) 8.12% 
D) 13.54% 
A) 13.0% 
B) 7.8% 
C) 8.12% 
D) 13.54%

Question 6

Witin's stock price is currently $34.25 and the current quarterly dividend is $0.25.Consensus estimates for Witin indicate a growth rate in earnings of 10% into the foreseeable future.If Witin plans to sell 1 million shares to raise new capital for expansion, what is the cost of new equity if the issuance costs are 8%?

Accepted Answer

A) 13.49% 
B) 10.87% 
C) 13.21% 
D) 13.17% 
A) 13.49% 
B) 10.87% 
C) 13.21% 
D) 13.17%

Question 7

What is the investment opportunity curve and how is it accomplished?

Accepted Answer

The investment opportunity curve is the

Question 8

California Best (CB), a sport shoe store, expects an operating income of$2.3 million this year.CB has no long-term debt.The firm is considering as expansion project.The current risk-free rate of return is 7% and the current market risk premium is 8.3%.If CB's beta is 20% greater than the overall market, what is the firm's cost of capital? Assume that CB has a marginal tax rate of 40%.

Accepted Answer

A) 8.3% 
B) 16.96% 
C) 9.96% 
D) 15.3% 
A) 8.3% 
B) 16.96% 
C) 9.96% 
D) 15.3%

Question 9

Mid-States Utility Company just issued at $3.20 cumulative preferred stock at a price to the public of $30 a share.The flotation costs were $1.50 a share and the issue will be retired in 20 years at its $30 par value.What is the cost of this preferred issue?

Accepted Answer

A) 11.3% 
B) 10.3% 
C) 10.7% 
D) 11.6% 
A) 11.3% 
B) 10.3% 
C) 10.7% 
D) 11.6%

Question 10

Heleveton Industries is 100% equity financed.Its current beta is 1.1.The expected market risk premium is 8.5% and the risk-free rate is 4.2%.If Heleveton changes its capital structure to 25% debt, it estimates its beta will increase to 1.2.If the after-tax cost of debt will be 6%, should Heleveton make the capital structure change?

Accepted Answer

A) Yes, cost of capital decreases by 2.52% 
B) Yes, cost of capital decreases 1.67% 
C) No, stock price would decrease due to increased risk 
D) No, cost of capital increases by 0.85% 
A) Yes, cost of capital decreases by 2.52% 
B) Yes, cost of capital decreases 1.67% 
C) No, stock price would decrease due to increased risk 
D) No, cost of capital increases by 0.85%

Question 11

Firms can raise capital in two ways.Why is it that internal funding does not have a zero cost?

Accepted Answer

Firms using internal funding, or retaine

Question 12

Which of the following statements (if any) is (are) true concerning companies that do not pay dividends?

Accepted Answer

A) The cost of equity capital can be estimated using the Capital Asset Pricing Model. 
B) The cost of equity capital is equal to the growth short-term rate of earnings per share. 
C) The dividend capitalization model can be used to determine an accurate cost of equity capital. 
D) The cost of equity capital cannot be determined by using the CAPM, the risk premium on debt approach, or by estimating k e for comparable dividend-paying stocks in their industry. 
A) The cost of equity capital can be estimated using the Capital Asset Pricing Model. 
B) The cost of equity capital is equal to the growth short-term rate of earnings per share. 
C) The dividend capitalization model can be used to determine an accurate cost of equity capital. 
D) The cost of equity capital cannot be determined by using the CAPM, the risk premium on debt approach, or by estimating k e for comparable dividend-paying stocks in their industry.

Question 13

Temple Company's common stock dividends have grown over the past 5-year period from $0.60 per share to $0.89 (today).Assume that Temple's dividends are expected to grow at this rate for the foreseeable future.Temple's stock is currently selling for $12 per share.New common stock can be sold to net the company $11 per share.Determine the costs of internal and external equity to Temple.

Accepted Answer

A) 18.1%;18.9% 
B) 15.9%;16.6% 
C) 16.2%;16.9% 
D) 15.9%;18.9% 
A) 18.1%;18.9% 
B) 15.9%;16.6% 
C) 16.2%;16.9% 
D) 15.9%;18.9%

Question 14

Weltron has a target capital structure of 35% debt and 65% equity.If the firm expects net income of $12.3 million and an annual dividend of $0.12 per share, what is the expected equity break point? There are 12 million shares outstanding.

Accepted Answer

A) $18,923,076 
B) $16,707,692 
C) $10,061,538 
D) $2,215,385 
A) $18,923,076 
B) $16,707,692 
C) $10,061,538 
D) $2,215,385

Question 15

How is the marginal cost of the various component capital sources determined?

Accepted Answer

The marginal cost of funds is the cost o

Question 16

American Dental Laser is selling a 10 year $1,000 face value bond with an 8% coupon rate.Interest is paid annually.The price to the public is $820 and the issue costs per bond are $10 each.Compute the pretax cost of debt for these bonds.

Accepted Answer

A) 11.1% 
B) 11.3% 
C) 11.5% 
D) 11.8% 
A) 11.1% 
B) 11.3% 
C) 11.5% 
D) 11.8%

Question 17

There are two primary ways that capital is raised.Which of the following statements is/are correct?

Accepted Answer

A) Only statement I is correct 
B) Only statement II is correct 
C) Both statements I and II are correct 
D) Neither statement I nor II is correct 
A) Only statement I is correct 
B) Only statement II is correct 
C) Both statements I and II are correct 
D) Neither statement I nor II is correct

Question 18

Historic average capital costs are new (marginal) resource allocation decisions.

Accepted Answer

A) not relevant for making 
B) very useful when making 
C) necessary for making 
D) the relevant costs for making 
A) not relevant for making 
B) very useful when making 
C) necessary for making 
D) the relevant costs for making

Question 19

If a firm will use only equity funds during the current capital budgeting period then the is the correct capital cost to use for computing the cost of funds for the firm.

Accepted Answer

A) cost of equity capital 
B) weighted cost of funds 
C) historical cost of funds 
D) all of these answers are correct 
A) cost of equity capital 
B) weighted cost of funds 
C) historical cost of funds 
D) all of these answers are correct

Question 20

What is the cost of common stock for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket.The optimal capital structure is listed below:
$$\begin{array} { | l | c | } 
\hline \text { Source of Capitrl } & \text { Weifht } \
\hline \text { Lang-Term Debt } & 25 \% \
\hline \text { Preferred Stack } & 2 [ 1 \% \
\hline \text { Camman Stack } & 55 \% \
\hline
\end{array}$$

Accepted Answer

A) 12.25% 
B) 19.75% 
C) 14.97% 
D) 13.22% 
A) 12.25% 
B) 19.75% 
C) 14.97% 
D) 13.22%

Exam 12: The Cost of Capital, Capital Structure, and Dividend Policy

The cost of capital is

The cost of external equity is greater than the cost of internal equity because

In many instances book value, rather than market value, may be used to determine the weighted average cost of capital.This is because of all of the following EXCEPT:

The Allegheny Valley Power Company common stock has a beta of 0.80.If the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of equity capital for the firm (using the CAPM).

Calculate the after-tax cost of preferred stock for Ohio Valley Power Company, which is planning to sell $100 million of $3.25 cumulative preferred stock to the public at a price of $25 per share.Flotation costs are $1.00 per share.Ohio Valley has a marginal income tax rate of 40%.

What is the investment opportunity curve and how is it accomplished?

Mid-States Utility Company just issued at $3.20 cumulative preferred stock at a price to the public of $30 a share.The flotation costs were $1.50 a share and the issue will be retired in 20 years at its $30 par value.What is the cost of this preferred issue?

Firms can raise capital in two ways.Why is it that internal funding does not have a zero cost?

Which of the following statements (if any) is (are) true concerning companies that do not pay dividends?

Weltron has a target capital structure of 35% debt and 65% equity.If the firm expects net income of $12.3 million and an annual dividend of $0.12 per share, what is the expected equity break point? There are 12 million shares outstanding.

How is the marginal cost of the various component capital sources determined?

American Dental Laser is selling a 10 year $1,000 face value bond with an 8% coupon rate.Interest is paid annually.The price to the public is $820 and the issue costs per bond are $10 each.Compute the pretax cost of debt for these bonds.

There are two primary ways that capital is raised.Which of the following statements is/are correct?

Historic average capital costs are new (marginal) resource allocation decisions.

If a firm will use only equity funds during the current capital budgeting period then the is the correct capital cost to use for computing the cost of funds for the firm.

What is the cost of common stock for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket.The optimal capital structure is listed below: Source of Capitrl Weifht Lang-Term Debt 25\% Preferred Stack 2[1\% Camman Stack 55\%

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

A: The Time Value of Money

Fixed-Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Capital Budgeting: Decision Criteria and Real Option Considerations

A: Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

Capital Structure Concepts

Capital Structure Management in Practice

A: Capital Structure Management in Practice

Dividend Policy

Working Capital Management

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate-Term Financing

Financing with Derivatives

A: Financing with Derivatives

Risk Management

International Financial Management

Corporate Restructuring

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