Question 1

If a preferred stock is callable, then the calculation of the cost of preferred stock financing is

Accepted Answer

A)  similar to that for bonds 
B)  equal to Dp/Pn 
C)  equal to Dp less flotation costs 
D)  less than Dp/Pn 
A)  similar to that for bonds 
B)  equal to Dp/Pn 
C)  equal to Dp less flotation costs 
D)  less than Dp/Pn

Question 2

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:

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 3

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 dividend capitalization model approach. (Compute answer to the nearest 0.1%).

Accepted Answer

A)  12.3% 
B)  13.4% 
C)  13.0% 
D)  12.7% 
A)  12.3% 
B)  13.4% 
C)  13.0% 
D)  12.7%

Question 4

The historic beta of a firm is of little use as a forecast of the firm's future systematic risk characteristics when

Accepted Answer

A)  the firm is growing at a rate of 7-10 percent a year 
B)  the firm is expanding an existing product line 
C)  the firm is expanding into a new product line 
D)  all of these answers are correct 
A)  the firm is growing at a rate of 7-10 percent a year 
B)  the firm is expanding an existing product line 
C)  the firm is expanding into a new product line 
D)  all of these answers are correct

Question 5

What are the reasons that the cost of external equity is greater than the cost of internal equity?

Accepted Answer

1. External equity has issuance costs as

Question 6

PDQ Inc. has a weighted cost of capital of 14.6 percent and has an opportunity to invest in the following average risk projects:  
In which projects should PDQ invest? Assume no capital rationing.

Accepted Answer

A)  1 & 2 
B)  2 & 3 
C)  1 & 3 
D)  cannot be determined from the information provided 
A)  1 & 2 
B)  2 & 3 
C)  1 & 3 
D)  cannot be determined from the information provided

Question 7

Using rounded whole percents for the various costs and weighted costs, what is the weighted average cost of capital for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket. The optimal capital structure is listed below:

Accepted Answer

A)  12% 
B)  8% 
C)  15% 
D)  18% 
A)  12% 
B)  8% 
C)  15% 
D)  18%

Question 8

Easy Slider recently sold a 15 year $1,000 face value bond at a discount for $700 that net the firm $692 after flotation costs. The low coupon bond has a 6% coupon with interest paid semiannually. If Easy Slider has a marginal tax rate of 40 percent, what is its after-tax cost of debt for these bonds?

Accepted Answer

A)  10.0% 
B)  6.0% 
C)  9.2% 
D)  7.8% 
A)  10.0% 
B)  6.0% 
C)  9.2% 
D)  7.8%

Question 9

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?

Accepted Answer

A)  1 and 2 
B)  1 and 3 
C)  1, 2, and 3 
D)  cannot be determined from the information provided 
A)  1 and 2 
B)  1 and 3 
C)  1, 2, and 3 
D)  cannot be determined from the information provided

Question 10

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 11

During the 1980s, the cost of capital for U.S. firms averaged about 3.3 percentage points higher than Japanese firms. During 1990 this disadvantage may have disappeared due to:

Accepted Answer

A)  higher exports to the U.S. 
B)  higher real interest rates in Japan 
C)  larger shareholder interest 
D)  higher Japanese stock market 
A)  higher exports to the U.S. 
B)  higher real interest rates in Japan 
C)  larger shareholder interest 
D)  higher Japanese stock market

Question 12

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 the above 
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 the above

Question 13

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 14

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 15

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 16

What is the cost of equity for East Roon, if the firm is expected to always pay a constant dividend of $2.22? The firm's common stock is presently selling for $18.50.

Accepted Answer

A)  8.3% 
B)  12.0% 
C)  10.2% 
D)  cannot be determined from the information given 
A)  8.3% 
B)  12.0% 
C)  10.2% 
D)  cannot be determined from the information given

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

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 19

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 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

If a preferred stock is callable, then the calculation of the cost of preferred stock financing is

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:

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 dividend capitalization model approach. (Compute answer to the nearest 0.1%).

The historic beta of a firm is of little use as a forecast of the firm's future systematic risk characteristics when

What are the reasons that the cost of external equity is greater than the cost of internal equity?

PDQ Inc. has a weighted cost of capital of 14.6 percent and has an opportunity to invest in the following average risk projects: In which projects should PDQ invest? Assume no capital rationing.

Using rounded whole percents for the various costs and weighted costs, what is the weighted average cost of capital for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket. The optimal capital structure is listed below:

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.

During the 1980s, the cost of capital for U.S. firms averaged about 3.3 percentage points higher than Japanese firms. During 1990 this disadvantage may have disappeared due to:

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

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

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

What is the cost of equity for East Roon, if the firm is expected to always pay a constant dividend of $2.22? The firm's common stock is presently selling for $18.50.

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?

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

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

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

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

Capital Budgeting and Risk

Capital Structure Concepts

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-term Financing

The Management of Cash and Marketable Securities

Management of Accounts Receivable and Inventories

Lease and Intermediate-term Financing

Financing With Derivatives

Risk Management

International Financial Management

Corporate Restructuring

Continuous Compounding and Discounting

Mutually Exclusive Investments Having Unequal Lives

Breakeven Analysis

Bond Refunding Analysis

Taxes

Filters

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