Question 1

The cost of debt to the firm is adjusted for _____.

Accepted Answer

A)  marginal revenue generated 
B)  taxes 
C)  interest rate 
D)  internal rate of return 
E)  return to investors 
A)  marginal revenue generated 
B)  taxes 
C)  interest rate 
D)  internal rate of return 
E)  return to investors

Question 2

Which of the following components of capital structure is adjusted to account for tax savings?

Accepted Answer

A)  Cost of preferred stock 
B)  Cost of debt 
C)  Cost of retained earnings 
D)  Cost of new issue of common stock 
E)  Cost of dividend payout 
A)  Cost of preferred stock 
B)  Cost of debt 
C)  Cost of retained earnings 
D)  Cost of new issue of common stock 
E)  Cost of dividend payout

Question 3

Under normal circumstances, the weighted average cost of capital is used as the firm's required rate of return because:

Accepted Answer

A)  as long as the firm's investments earn returns greater than the cost of capital, the value of the firm will not decrease. 
B)  returns below the cost of capital will cover all the fixed costs associated with the capital and provide excess returns to the firm's stockholders. 
C)  it is comparable to the average of all the interest rates on debt that currently prevail in the financial markets. 
D)  it is an indication of the return the firm is expecting to earn in future from all of its expansion plans. 
E)  the weighted average cost of capital remains unchanged if the components costs of capital changes. 
A)  as long as the firm's investments earn returns greater than the cost of capital, the value of the firm will not decrease. 
B)  returns below the cost of capital will cover all the fixed costs associated with the capital and provide excess returns to the firm's stockholders. 
C)  it is comparable to the average of all the interest rates on debt that currently prevail in the financial markets. 
D)  it is an indication of the return the firm is expecting to earn in future from all of its expansion plans. 
E)  the weighted average cost of capital remains unchanged if the components costs of capital changes.

Question 4

Marigold Inc.'s common stock currently sells for $40 per share, but the firm will net only $34 per share from the sale of new common stock. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year. Which of the following is the cost of newly issued common stock? (Round off the answer to two decimal places.)

Accepted Answer

A)  12.24 percent 
B)  13.56 percent 
C)  14.12 percent 
D)  16.47 percent 
E)  17.53 percent 
A)  12.24 percent 
B)  13.56 percent 
C)  14.12 percent 
D)  16.47 percent 
E)  17.53 percent

Question 5

The _____ of the bond is a cost to the firm for using investors' funds.

Accepted Answer

A)  Coupon rate 
B)  Internal rate of return 
C)  Yield to maturity (YTM) 
D)  Maturity value 
E)  Discount rate 
A)  Coupon rate 
B)  Internal rate of return 
C)  Yield to maturity (YTM) 
D)  Maturity value 
E)  Discount rate

Question 6

The component costs of capital are market-determined variables in as much as they are based on investors' required returns.

Accepted Answer

A) True 
 B)False

Question 7

Omega Inc. has a history of abnormally high growth due to general economic fluctuations. Estimating the cost of common equity using the discounted cash flow approach is difficult because:

Accepted Answer

A)  the dividend yield is extremely difficult to estimate. 
B)  the proper growth rate is difficult to establish. 
C)  the market price of the common equity is very volatile. 
D)  the firm grows at a constant rate in perpetuity. 
E)  the firm's historical data of dividend yield is unavailable. 
A)  the dividend yield is extremely difficult to estimate. 
B)  the proper growth rate is difficult to establish. 
C)  the market price of the common equity is very volatile. 
D)  the firm grows at a constant rate in perpetuity. 
E)  the firm's historical data of dividend yield is unavailable.

Question 8

The target capital structure of a firm is the capital structure that:

Accepted Answer

A)  minimizes the operating risk of the firm's assets. 
B)  maximizes the tax shield created by debt. 
C)  minimizes the default risk of long-term debt. 
D)  maximizes the price of the firm's stock. 
E)  minimizes the risk premium paid on long-term debt. 
A)  minimizes the operating risk of the firm's assets. 
B)  maximizes the tax shield created by debt. 
C)  minimizes the default risk of long-term debt. 
D)  maximizes the price of the firm's stock. 
E)  minimizes the risk premium paid on long-term debt.

Question 9

Bouchard Company's stock sells for $20 per share, its last dividend (D0) was $1.00, its growth rate is a constant 6 percent, and the company would incur a flotation cost of 20 percent if it sold new common stock. Which of the following is the cost of issuing new common stock? (Round off the answer to two decimal places.)

Accepted Answer

A)  11.96 percent 
B)  12.25 percent 
C)  12.63 percent 
D)  10.24 percent 
E)  11.42 percent 
A)  11.96 percent 
B)  12.25 percent 
C)  12.63 percent 
D)  10.24 percent 
E)  11.42 percent

Question 10

Which of the following is a capital component for the purpose of calculating the weighted average cost of capital in capital budgeting?

Accepted Answer

A)  The after-tax cost of long-term debt 
B)  The after-tax cost of common stock 
C)  The after-tax cost of preferred stock 
D)  The after-tax cost of retained earnings 
E)  The after-tax cost of new equity 
A)  The after-tax cost of long-term debt 
B)  The after-tax cost of common stock 
C)  The after-tax cost of preferred stock 
D)  The after-tax cost of retained earnings 
E)  The after-tax cost of new equity

Question 11

A firm should continue to invest in capital budgeting projects until its marginal cost of capital is:

Accepted Answer

A)  equal to the net present value (NPV) of the last project purchased. 
B)  equal to the internal rate of return (IRR) of the first project purchased. 
C)  equal to the marginal return generated by the last project purchased. 
D)  equal to the cash generated by the last project purchased. 
E)  equal to the weighted average cost of all the projects purchased. 
A)  equal to the net present value (NPV) of the last project purchased. 
B)  equal to the internal rate of return (IRR) of the first project purchased. 
C)  equal to the marginal return generated by the last project purchased. 
D)  equal to the cash generated by the last project purchased. 
E)  equal to the weighted average cost of all the projects purchased.

Question 12

A firm's weighted average cost of capital (WACC) is:

Accepted Answer

A)  set by the board of directors of the firm because it is the benchmark they use to evaluate upper management. 
B)  regulated by the Internal Revenue Service (IRS) because tax-deductible debt is included in the computation. 
C)  determined by the financial markets because investors provide the funds used by firms and these funds have costs, which are the returns demanded by investors. 
D)  the same as the firm's internal rate of return (IRR). 
E)  the total net present value (NPV) of all the capital budgeting projects in which the firm invests in any year. 
A)  set by the board of directors of the firm because it is the benchmark they use to evaluate upper management. 
B)  regulated by the Internal Revenue Service (IRS) because tax-deductible debt is included in the computation. 
C)  determined by the financial markets because investors provide the funds used by firms and these funds have costs, which are the returns demanded by investors. 
D)  the same as the firm's internal rate of return (IRR). 
E)  the total net present value (NPV) of all the capital budgeting projects in which the firm invests in any year.

Question 13

Oval Inc. has just paid a dividend of $1.50 per share on its common stock, and it expects this dividend to grow by 4 percent per year, indefinitely. The firm plans to issue common stock at $16. The firm's investment bankers believe that new issues of common stock would have a flotation cost equal to 4 percent of the current market price. Which of the following is the cost of newly issued common stock? (Round off the answer to two decimal places.)

Accepted Answer

A)  14.16 percent 
B)  10.15 percent 
C)  15.36 percent 
D)  13.80 percent 
E)  16.92 percent 
A)  14.16 percent 
B)  10.15 percent 
C)  15.36 percent 
D)  13.80 percent 
E)  16.92 percent

Question 14

The correct discount rate for a firm to use in capital budgeting, assuming that new investments are as risky as the firm's existing assets, is its marginal cost of capital.

Accepted Answer

A) True 
 B)False

Question 15

As per the Bond-Yield-Plus-Risk-Premium Approach, analysts estimate the cost of common equity by adding a risk premium of 3 to 5 percentage points to:

Accepted Answer

A)  the cost of preferred stock of the firm. 
B)  the risk free rate of the common equity of the firm. 
C)  the interest rate on the long term debt of the firm. 
D)  the return on the firm's investment in municipal bonds. 
E)  the growth rate of the firm. 
A)  the cost of preferred stock of the firm. 
B)  the risk free rate of the common equity of the firm. 
C)  the interest rate on the long term debt of the firm. 
D)  the return on the firm's investment in municipal bonds. 
E)  the growth rate of the firm.

Question 16

The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt.

Accepted Answer

A) True 
 B)False

Question 17

Rollins Corporation is constructing its MCC schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm's marginal tax rate is 40 percent. Which of the following is Rollins' component cost of debt? (Round off the answer to one decimal place.)

Accepted Answer

A)  8.4 percent 
B)  7.2 percent 
C)  6.8 percent 
D)  5.3 percent 
E)  9.5 percent 
A)  8.4 percent 
B)  7.2 percent 
C)  6.8 percent 
D)  5.3 percent 
E)  9.5 percent

The cost of debt to the firm is adjusted for _____.

Which of the following components of capital structure is adjusted to account for tax savings?

Under normal circumstances, the weighted average cost of capital is used as the firm's required rate of return because:

The _____ of the bond is a cost to the firm for using investors' funds.

The component costs of capital are market-determined variables in as much as they are based on investors' required returns.

Omega Inc. has a history of abnormally high growth due to general economic fluctuations. Estimating the cost of common equity using the discounted cash flow approach is difficult because:

The target capital structure of a firm is the capital structure that:

Which of the following is a capital component for the purpose of calculating the weighted average cost of capital in capital budgeting?

A firm should continue to invest in capital budgeting projects until its marginal cost of capital is:

A firm's weighted average cost of capital (WACC) is:

The correct discount rate for a firm to use in capital budgeting, assuming that new investments are as risky as the firm's existing assets, is its marginal cost of capital.

As per the Bond-Yield-Plus-Risk-Premium Approach, analysts estimate the cost of common equity by adding a risk premium of 3 to 5 percentage points to:

The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

Exam 11: The Cost of Capital

The cost of debt to the firm is adjusted for _____.

Which of the following components of capital structure is adjusted to account for tax savings?

Under normal circumstances, the weighted average cost of capital is used as the firm's required rate of return because:

The _____ of the bond is a cost to the firm for using investors' funds.

The component costs of capital are market-determined variables in as much as they are based on investors' required returns.

Omega Inc. has a history of abnormally high growth due to general economic fluctuations. Estimating the cost of common equity using the discounted cash flow approach is difficult because:

The target capital structure of a firm is the capital structure that:

Which of the following is a capital component for the purpose of calculating the weighted average cost of capital in capital budgeting?

A firm should continue to invest in capital budgeting projects until its marginal cost of capital is:

A firm's weighted average cost of capital (WACC) is:

The correct discount rate for a firm to use in capital budgeting, assuming that new investments are as risky as the firm's existing assets, is its marginal cost of capital.

As per the Bond-Yield-Plus-Risk-Premium Approach, analysts estimate the cost of common equity by adding a risk premium of 3 to 5 percentage points to:

The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters