Question 1

A firm has a beta of 1.2.The return in the market is 14% and the risk-free rate is 6%.The estimated cost of common stock equity is:

Accepted Answer

A) 6% 
B) 7.2% 
C) 15.6% 
D) 14% 
A) 6% 
B) 7.2% 
C) 15.6% 
D) 14%

Question 2

What is the cost of equity for Fat Rat Laboratories, Inc.? The stock has the following dividends, the stock sells for $70 with flotation costs of $6 and it expects to pay a dividend of $3.20 next year (rounded).
$$\begin{array} { | c | c | } 
\hline \text { YEARE } & \text { DIVIDENDS } \
\hline 2014 & \mathbf { 2 . 9 4 } \
\hline 2013 & 2.70 \
\hline 2012 & 2.49 \
\hline 2011 & 2.29 \
\hline
\end{array}$$

Accepted Answer

A) 14.00% 
B) 13.57% 
C) 12.26% 
D) 10.00% 
A) 14.00% 
B) 13.57% 
C) 12.26% 
D) 10.00%

Question 3

All of the following are true EXCEPT:

Accepted Answer

A) The claims of preferred stockholders on the firm's earnings are junior to those of debt-holders. 
B) The risk of recapitalization increases a firm's required rate of return. 
C) Long-term state government securities are always less risky than corporate long-term securities of the same maturity. 
D) The cost of capital to the firm is equal to the equilibrium rate of return demanded by investors in the capital markets for securities with that degree of risk 
A) The claims of preferred stockholders on the firm's earnings are junior to those of debt-holders. 
B) The risk of recapitalization increases a firm's required rate of return. 
C) Long-term state government securities are always less risky than corporate long-term securities of the same maturity. 
D) The cost of capital to the firm is equal to the equilibrium rate of return demanded by investors in the capital markets for securities with that degree of risk

Question 4

Wright Express (WE) has a capital structure of30% debt and 70% equity.WE is considering a project that requires an investment of$2.6 million.To finance this project, WE plans to issue 10-year bonds with a coupon interest rate of 12%.Each of these bonds has a $1,000 face value and will be sold to net WE $980.If the current risk-free rate is 7% and the expected market return is 14.5%, what is the weighted cost of capital for WE? Assume WE has a beta of 1.20 and a marginal tax rate of 40%.

Accepted Answer

A) 14.9% 
B) 12.4% 
C) 13.4% 
D) 16.0% 
A) 14.9% 
B) 12.4% 
C) 13.4% 
D) 16.0%

Question 5

Columbia Gas Company's (CG) current capital structure is 35% debt and 65% equity.This year CG has earnings after tax of $5.31 million and is paying $1.6 million in dividends.To finance a transmission pipe line, CG can borrow $2 million at a cost of 10%, the same rate that CG is currently paying on a total of $15 million long-term debt.CG has 1,000,000 shares outstanding and its current market price is $31.If CG's long-term growth rate of dividends is expected to be 8%, what is the weighted cost of capital for the firm? Assume a marginal tax rate of 40%.

Accepted Answer

A) 10.9% 
B) 13.6% 
C) 19.6% 
D) 16.9% 
A) 10.9% 
B) 13.6% 
C) 19.6% 
D) 16.9%

Question 6

The Institutional Brokers' Estimate Service (IBES) summarizes analysts' .

Accepted Answer

A) short-term earnings forecasts 
B) long-term earnings growth rates 
C) bankruptcy forecasts 
D) short-term earnings forecasts and long-term earnings growth rates 
A) short-term earnings forecasts 
B) long-term earnings growth rates 
C) bankruptcy forecasts 
D) short-term earnings forecasts and long-term earnings growth rates

Question 7

Bay State Technology has determined that its cost of equity is 15% and its after-tax cost of debt is 7.2%.Bay State expects to earn $14 million after taxes next year and, as a new firm, does not pay any dividends.The stock sells for $24.Bonds are currently selling at par value.Compute Bay State's weighted cost of capital.A partial balance sheet is shown below:

Accepted Answer

A)  13.4% 
B)  13.1% 
C)  11.6% 
D)  12.7% 
A)  13.4% 
B)  13.1% 
C)  11.6% 
D)  12.7%

Question 8

refers to the variability in the firm's operating earnings.

Accepted Answer

A) Business risk 
B) Financial risk 
C) Marketability risk 
D) Interest rate risk 
A) Business risk 
B) Financial risk 
C) Marketability risk 
D) Interest rate risk

Question 9

If a firm is losing money then the after-tax cost of debt is

Accepted Answer

A) equal to kd(1 - T) 
B) found by trial and error 
C) equal to the pretax cost of debt 
D) equal to the yield to first call date 
A) equal to kd(1 - T) 
B) found by trial and error 
C) equal to the pretax cost of debt 
D) equal to the yield to first call date

Question 10

According to Value Line, Bestway has a beta of 1.15.If 3-month Treasury bills currently yield 7.9 percent and the market risk premium is estimated to be 8.3 percent, what is Bestway's cost of equity capital?

Accepted Answer

A) 17.45% 
B) 8.36% 
C) 9.55% 
D) 16.2% 
A) 17.45% 
B) 8.36% 
C) 9.55% 
D) 16.2%

Question 11

The following financial information is available on Rawls Manufacturing Company:
 
Rawls can issue new common stock to net the company $44 per share.Determine the cost of internal equity capital using the capital asset pricing model approach.(Compute answer to the nearest 0.1%.)

Accepted Answer

A) 12.9% 
B) 12.6% 
C) 13.0% 
D) 11.8% 
A) 12.9% 
B) 12.6% 
C) 13.0% 
D) 11.8%

Question 12

The CAPM assumes that the only risk of concern to the investor is , which is measured by .

Accepted Answer

A) Unsystematic risk, beta 
B) Systematic risk, the return to the market portfolio 
C) Systematic risk, beta 
D) Unsystematic risk, the return to the market portfolio 
A) Unsystematic risk, beta 
B) Systematic risk, the return to the market portfolio 
C) Systematic risk, beta 
D) Unsystematic risk, the return to the market portfolio

Question 13

The cost of internal equity is cheaper than the cost of external equity.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 14

Wellington Gas has a target capital structure of 50 percent common equity, 40 percent debt, and 10 percent preferred stock.The cost of retained earnings is 16 percent, and the cost of new equity (external) is 16.7 percent.Wellington can sell debentures that will have an after-tax cost of 8.3 percent and the after-tax cost of preferred stock will be 11.9 percent.What is the marginal cost of capital before and after the break point?

Accepted Answer

A) 12.51% and 12.86% 
B) 11.18% and 11.53% 
C) 14.23% and 14.68% 
D) 12.51% and 11.53% 
A) 12.51% and 12.86% 
B) 11.18% and 11.53% 
C) 14.23% and 14.68% 
D) 12.51% and 11.53%

Question 15

Mid-South Utilities will sell $10 million of $100 par value preferred stock that will pay an annual dividend of $9.75.Mid-South will receive $93.98 per share after flotation costs.If the issue must be retired in 20 years, what is the cost of the preferred issue?

Accepted Answer

A) 10.37% 
B) 10.50% 
C) 10.23% 
D) 9.75% 
A) 10.37% 
B) 10.50% 
C) 10.23% 
D) 9.75%

Question 16

The most appropriate weights to use in calculating a firm's cost of capital are the proportions of the components in the firm's capital structure.

Accepted Answer

A) historical average 
B) long-range target 
C) current 
D) industry average 
A) historical average 
B) long-range target 
C) current 
D) industry average

Question 17

GQ earned $740,000 before taxes this year.The firm has a debt ratio of 30 percent, a marginal tax rate of 35 percent, and a dividend payout ratio of 40 percent.GQ has no preferred stock.What is GQ's break point for equity?

Accepted Answer

A) $634,286 
B) $962,000 
C) $412,286 
D) $288,600 
A) $634,286 
B) $962,000 
C) $412,286 
D) $288,600

Question 18

A firm with a 40 percent marginal tax rate has a capital structure of $60,000,000 in debt and $140,000,000 in equity.What is the firm's weighted cost of capital if the marginal pretax cost of debt is 12 percent, the firm's average pretax cost of debt outstanding is 8%, and the cost of equity is 14.5 percent?

Accepted Answer

A) 13.75% 
B) 11.59% 
C) 12.31% 
D) 10.45% 
A) 13.75% 
B) 11.59% 
C) 12.31% 
D) 10.45%

Question 19

What is Bodacious Bodywear's weighted average cost of capital under the following conditions:
*The firm has 30% debt, 10% preferred stock, and 60% equity
*The cost of common equity is 14% and the cost of preferred stock is 9%
*The firm's debt has a before-tax cost of debt of 10% (including flotation costs)
*The firm is in the 40% tax bracket

Accepted Answer

A) 11.1% 
B) 8.5% 
C) 12.3% 
D) 10.5% 
A) 11.1% 
B) 8.5% 
C) 12.3% 
D) 10.5%

Question 20

Investors can form earnings growth expectations from various sources, including

Accepted Answer

A) potential sales growth. 
B) current earnings and retention rates. 
C) assumed product development. 
D) investors' required rate of return. 
A) potential sales growth. 
B) current earnings and retention rates. 
C) assumed product development. 
D) investors' required rate of return.

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

A firm has a beta of 1.2.The return in the market is 14% and the risk-free rate is 6%.The estimated cost of common stock equity is:

What is the cost of equity for Fat Rat Laboratories, Inc.? The stock has the following dividends, the stock sells for $70 with flotation costs of $6 and it expects to pay a dividend of $3.20 next year (rounded). YEARE DIVIDENDS 2014 2013 2.70 2012 2.49 2011 2.29

All of the following are true EXCEPT:

The Institutional Brokers' Estimate Service (IBES) summarizes analysts' .

refers to the variability in the firm's operating earnings.

If a firm is losing money then the after-tax cost of debt is

According to Value Line, Bestway has a beta of 1.15.If 3-month Treasury bills currently yield 7.9 percent and the market risk premium is estimated to be 8.3 percent, what is Bestway's cost of equity capital?

The following financial information is available on Rawls Manufacturing Company: Rawls can issue new common stock to net the company $44 per share.Determine the cost of internal equity capital using the capital asset pricing model approach.(Compute answer to the nearest 0.1%.)

The CAPM assumes that the only risk of concern to the investor is , which is measured by .

The cost of internal equity is cheaper than the cost of external equity.Which of the following statements is/are correct?

Mid-South Utilities will sell $10 million of $100 par value preferred stock that will pay an annual dividend of $9.75.Mid-South will receive $93.98 per share after flotation costs.If the issue must be retired in 20 years, what is the cost of the preferred issue?

The most appropriate weights to use in calculating a firm's cost of capital are the proportions of the components in the firm's capital structure.

GQ earned $740,000 before taxes this year.The firm has a debt ratio of 30 percent, a marginal tax rate of 35 percent, and a dividend payout ratio of 40 percent.GQ has no preferred stock.What is GQ's break point for equity?

Investors can form earnings growth expectations from various sources, including

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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