Exam 11: The Cost of Capital

Alpha Inc. combines the marginal cost of capital (MCC) and the investment opportunity schedules (IOS) on a graph. Which of the following areas on the graph shows the maximum excess of returns over costs?

Which of the following statements is true of the capital asset pricing model (CAPM)?

Beige Inc. plans to issue preferred stock that pays an $11.50 dividend per share and sells for $120 per share in the market. It will cost 4 percent, or $4.80 per share, to issue the new preferred stock, so Beige will net $115.20 per share. Which of the following is Beige's cost of preferred stock? (Round off the answer to two decimal places.)

The firm's cost of external equity capital is the same as the required rate of return on the firm's outstanding common stock.

The investment opportunity schedule (IOS) plotted on a graph shows:

Beige Inc. has to choose from three projects whose internal rates of return (IRRs) are more than the marginal cost of capital (MCC). Beige should choose those projects that _____.

The MCC schedule is either horizontal or rising, which implies that the cost of capital to a firm increases as it raises larger and larger amounts of capital. The rising section of the MCC schedule:

Which of the following is an assumption in applying the capital asset pricing model (CAPM) to estimate the cost of equity capital?

Coral Inc.'s preferred stock currently sells for $90 a share and pays a dividend of $10 per share; however, the firm will net only $80 per share from the sale of new preferred stock. What is the firm's cost of newly issued preferred stock? (Round off the answer to two decimal places.)

The cost of issuing preferred stock by a corporation must be adjusted to an after-tax figure because of the 70 percent dividend exclusion provision for corporations holding other corporations' preferred stock.

Which of the following statements is true of flotation costs?

The firm's cost of capital represents the maximum rate of return that a firm can earn from its capital budgeting projects to ensure that the value of the firm increases.

The rates of return, or costs, that a firm must pay to raise funds to invest in capital budgeting projects are determined by:

Which of the following statements is true of the impact of tax on the cost of capital of a firm?

If a project's _____ exceeds the firm's cost of capital, its NPV will be positive.

Alpha Inc.'s beta is 1.2, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Which of the following is Alpha's cost of retained earnings using the capital asset pricing model (CAPM) approach?

Which of the following is true of the change in the weighted average cost of capital of a firm?

The marginal cost of capital (MCC) is the cost of the last dollar of new capital that the firm raises, and the marginal cost declines as more and more of a specific type of capital is raised during a given period.

The marginal cost of capital _____ as more capital is raised during a given period.

Super Solutions Inc. is a constant growth firm, which just paid a dividend of $3.00, sells for $33.00 per share, and has a growth rate of 6 percent. Which of the following is the cost of retained earnings using the discounted cash flow (DCF) approach? (Round off the answer to two decimal places.)