Question 1

The optimal capital budget occurs at the point where two curves intersect.Which of the following is/are one of those curves?

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 2

Sharp's current capital structure of 60 percent equity, 35 percent debt, and 5 percent preferred stock is considered optimal.This year Sharp expects to have earnings after tax of $3.6 million and to pay out $600,000 in dividends.Sharp can also raise up to $2 million in long-term debt at a pretax interest rate of 10.6 percent (all debt over $2 million will cost 11.4% pretax), and sell preferred stock at a cost of 11.5 percent.Sharp's marginal tax rate is 40 percent.The current value of Sharp's common stock is $36 and a dividend of $2.15 is expected to be paid during the coming year.Dividends have been growing at an annual compound rate of 8 percent a year and are expected to continue growing at that rate.New shares can be sold to net the firm $34.50.Sharp has an opportunity to invest in the following capital projects.Which one(s) should be accepted?
Project Cost Annual Cash Flow Project Life
$$\begin{array} { l l l r } 
1 & \$ 3.0 \text { million } & \$ 552,893 & 10 \text { years } \
2 & \$ 2.5 \text { million } & \$ 693,481 & 5 \text { years } \
3 & \$ 2.0 \text { million } & \$ 345,220 & 10 \text { years }
\end{array}$$

Accepted Answer

A)  1 and 2 $2.0 million $345,220 10 years 
B)  1 and 3 
C)  1, 2, and 3 
D)  cannot be determined from the information provided 
A)  1 and 2 $2.0 million $345,220 10 years 
B)  1 and 3 
C)  1, 2, and 3 
D)  cannot be determined from the information provided

Question 3

Small firms are reluctant to obtain capital through the sale of common stock because of:

Accepted Answer

A) potential loss of voting control 
B) high issuance costs 
C) high cost of debt 
D) both the potential loss of voting control and the high issuance costs 
A) potential loss of voting control 
B) high issuance costs 
C) high cost of debt 
D) both the potential loss of voting control and the high issuance costs

Question 4

The cost of debt must account for all of the following inputs EXCEPT:

Accepted Answer

A) Bond ratings. 
B) Issuance costs. 
C) Flotation costs. 
D) The tax rate. 
A) Bond ratings. 
B) Issuance costs. 
C) Flotation costs. 
D) The tax rate.

Question 5

What is the cost of a preferred stock with a $100 par value that pays a $9.60 dividend per year? The security has a flotation cost of $3.37 and will be retired at its par value in 20 years.

Accepted Answer

A) 9.6% 
B) 9.9% 
C) 10.0% 
D) 10.6% 
A) 9.6% 
B) 9.9% 
C) 10.0% 
D) 10.6%

Question 6

What is the cost of retained earnings for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket.The optimal capital structure is listed below:
$$\begin{array} { | c | c | } 
\hline \text { Source no Capital } & \text { Weight } \
\hline \text { Lang-Term Debt } & 25 \% \
\hline \text { Preferted Stack } & 2 [ \% \
\hline \text { Comman Stack } & 55 \% \
\hline
\end{array}$$

Accepted Answer

A) 10.12% 
B) 19.63% 
C) 13.78% 
D) 12.11% 
A) 10.12% 
B) 19.63% 
C) 13.78% 
D) 12.11%

Question 7

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 external equity capital using the dividend capitalization model approach.(Compute answer to the nearest 0.1%.)

Accepted Answer

A) 12.7% 
B) 14.4% 
C) 12.6% 
D) 11.4% 
A) 12.7% 
B) 14.4% 
C) 12.6% 
D) 11.4%

Question 8

Easy Slider Inc.sold a 15 year $1,000 face value bond with a 10 percent coupon rate.Interest is paid annually.After flotation costs, Easy Slider received $928 per bond.Compute the after-tax cost of debt for these bonds if the firm's marginal tax rate is 40 percent.

Accepted Answer

A) 6.0% 
B) 7.2% 
C) 7.8% 
D) 6.6% 
A) 6.0% 
B) 7.2% 
C) 7.8% 
D) 6.6%

Question 9

Retained earnings are a cheaper source of funds than the sale of new equity because

Accepted Answer

A) retention defers the payment of taxable dividends to shareholders 
B) there are no flotation costs 
C) new shares are usually priced below current market price 
D) all these 
A) retention defers the payment of taxable dividends to shareholders 
B) there are no flotation costs 
C) new shares are usually priced below current market price 
D) all these

Question 10

The optimal capital budget is indicated by the point at which the and the intersect.

Accepted Answer

A) depreciation schedule;investment opportunity schedule 
B) investment opportunity curve;marginal cost of capital curve 
C) investment opportunity curve;average cost of capital curve 
D) efficient portfolio curve;marginal cost of capital curve 
A) depreciation schedule;investment opportunity schedule 
B) investment opportunity curve;marginal cost of capital curve 
C) investment opportunity curve;average cost of capital curve 
D) efficient portfolio curve;marginal cost of capital curve

Question 11

Break points can be determined by dividing the amount of funds available from each financing source at a fixed cost by the proportion for that financing source.

Accepted Answer

A) weighted capital structure 
B) target capital structure 
C) economic capital structure 
D) divisional capital structure 
A) weighted capital structure 
B) target capital structure 
C) economic capital structure 
D) divisional capital structure

Question 12

Haulsee Inc.pays no dividend currently but is expected to start paying a small dividend next year.The 5-year old firm has a beta of 1.25 and current earnings of $0.90 per share.The current Treasury bill rate is 6.10% and the market risk premium is 8.8%.Determine Haulsee's cost of equity if the firm's tax rate is 40%.

Accepted Answer

A) 9.48% 
B) 17.1% 
C) 14.9% 
D) cannot determined from the information provided 
A) 9.48% 
B) 17.1% 
C) 14.9% 
D) cannot determined from the information provided

Question 13

Rank in ascending order (lowest to highest) the relative riskiness of the various types of corporate and government securities.

Accepted Answer

A) common stock, preferred stock, corporate debt, long-term government debt 
B) corporate debt, long-term government debt, preferred stock, common stock 
C) long-term government debt, corporate debt, preferred stock, common stock 
D) corporate debt, preferred stock, long-term government debt, common stock 
A) common stock, preferred stock, corporate debt, long-term government debt 
B) corporate debt, long-term government debt, preferred stock, common stock 
C) long-term government debt, corporate debt, preferred stock, common stock 
D) corporate debt, preferred stock, long-term government debt, common stock

Question 14

Zappin' Skeeters Corporation needs to know its cost of retained earnings.Based on the following information, compute the cost of retained earnings: The stock sells for $25, flotation costs are $3 and the firm is in the 35% tax bracket.

Accepted Answer

A)  15.71% 
B)  9.11% 
C)  12.56% 
D)  10.72% 
A)  15.71% 
B)  9.11% 
C)  12.56% 
D)  10.72%

Question 15

The optimal capital budget is determined by comparing the expected project returns to the company's

Accepted Answer

A) computed break points 
B) cost of equity schedule 
C) marginal cost of capital schedule 
D) optimal opportunity curve 
A) computed break points 
B) cost of equity schedule 
C) marginal cost of capital schedule 
D) optimal opportunity curve

Question 16

Studies analyzing the historical returns earned by common stock investors have found that the returns from average risk common stock investments over the years have averaged (arithmetically) percentage points than the returns on Treasury bills.

Accepted Answer

A) 6 to 8, higher 
B) 1 to 2, lower 
C) 3 to 4, higher 
D) 8 to 9, higher 
A) 6 to 8, higher 
B) 1 to 2, lower 
C) 3 to 4, higher 
D) 8 to 9, higher

Question 17

Explain how the investment opportunity curve is determined.

Accepted Answer

The investment opportunity cur

Question 18

The cost of common stock equity may be estimated by using which of the following?

Accepted Answer

A) Earnings curve 
B) Dupont analysis 
C) Capital asset pricing model 
D) Price/Earnings ratio 
A) Earnings curve 
B) Dupont analysis 
C) Capital asset pricing model 
D) Price/Earnings ratio

Question 19

What is the cost of preferred stock for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket.The optimal capital structure is listed below:
$\begin{array}{|l|c|}
\hline \text { Source of Capital } & \text { Weight } \
\hline \text { Long-Term Debt } & 25 \% \
\hline \text { Preferred Stock } & 20 \% \
\hline \text { Common Stock } & 55 \% \
\hline
\end{array}$

Accepted Answer

A) 4.9% 
B) 11.55% 
C) 7.88% 
D) 8.44% 
A) 4.9% 
B) 11.55% 
C) 7.88% 
D) 8.44%

Question 20

The cost of equity capital for non-dividend paying stocks can be determined by

Accepted Answer

A) using the Capital Asset Pricing Model 
B) estimating ke for comparable dividend-paying stocks in their industry 
C) forecasting the liquidation proceeds from the sale of the company's assets. 
D) using the CAPM and by estimating ke for comparable dividend-paying stocks in their industry 
A) using the Capital Asset Pricing Model 
B) estimating ke for comparable dividend-paying stocks in their industry 
C) forecasting the liquidation proceeds from the sale of the company's assets. 
D) using the CAPM and by estimating ke for comparable dividend-paying stocks in their industry

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

The optimal capital budget occurs at the point where two curves intersect.Which of the following is/are one of those curves?

Small firms are reluctant to obtain capital through the sale of common stock because of:

The cost of debt must account for all of the following inputs EXCEPT:

What is the cost of a preferred stock with a $100 par value that pays a $9.60 dividend per year? The security has a flotation cost of $3.37 and will be retired at its par value in 20 years.

What is the cost of retained earnings for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket.The optimal capital structure is listed below: Source no Capital Weight Lang-Term Debt 25\% Preferted Stack 2[\% Comman Stack 55\%

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 external equity capital using the dividend capitalization model approach.(Compute answer to the nearest 0.1%.)

Easy Slider Inc.sold a 15 year $1,000 face value bond with a 10 percent coupon rate.Interest is paid annually.After flotation costs, Easy Slider received $928 per bond.Compute the after-tax cost of debt for these bonds if the firm's marginal tax rate is 40 percent.

Retained earnings are a cheaper source of funds than the sale of new equity because

The optimal capital budget is indicated by the point at which the and the intersect.

Break points can be determined by dividing the amount of funds available from each financing source at a fixed cost by the proportion for that financing source.

Rank in ascending order (lowest to highest) the relative riskiness of the various types of corporate and government securities.

Zappin' Skeeters Corporation needs to know its cost of retained earnings.Based on the following information, compute the cost of retained earnings: The stock sells for $25, flotation costs are $3 and the firm is in the 35% tax bracket.

The optimal capital budget is determined by comparing the expected project returns to the company's

Studies analyzing the historical returns earned by common stock investors have found that the returns from average risk common stock investments over the years have averaged (arithmetically) percentage points than the returns on Treasury bills.

Explain how the investment opportunity curve is determined.

The cost of common stock equity may be estimated by using which of the following?

What is the cost of preferred stock for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket.The optimal capital structure is listed below: Source of Capital Weight Long-Term Debt 25\% Preferred Stock 20\% Common Stock 55\%

The cost of equity capital for non-dividend paying stocks can be determined by

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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