Question 1

What value should you assign as the flotation cost of internally generated equity financing?

Accepted Answer

A) A cost that yields the company's required rate of return on the funds utilized 
B) Fifty percent of the external flotation cost of equity 
C) A cost of zero 
D) The same cost as that of the external equity financing 
E) The same cost as that of the debt financing 
A) A cost that yields the company's required rate of return on the funds utilized 
B) Fifty percent of the external flotation cost of equity 
C) A cost of zero 
D) The same cost as that of the external equity financing 
E) The same cost as that of the debt financing

Question 2

Asian Foods needs $110,000 for a new project.The firm has a target capital structure of 30 percent debt and 70 percent external equity.The flotation cost of debt is 5.25 percent compared to 10.15 percent for equity.What amount does the firm need to raise?

Accepted Answer

A) $120,801.25 
B) $118,211.17 
C) $120,455.54 
D) $119,497.79 
E) $122,674.09 
A) $120,801.25 
B) $118,211.17 
C) $120,455.54 
D) $119,497.79 
E) $122,674.09

Question 3

A company's cost of debt will decrease when

Accepted Answer

A) market interest rates increase. 
B) the coupon rate on the company's bonds increase. 
C) tax rates increase. 
D) inflation rates increase. 
E) interest is paid semiannually versus annually. 
A) market interest rates increase. 
B) the coupon rate on the company's bonds increase. 
C) tax rates increase. 
D) inflation rates increase. 
E) interest is paid semiannually versus annually.

Question 4

The use of debt is called

Accepted Answer

A) financial leverage. 
B) production leverage. 
C) operating leverage. 
D) total asset turnover risk. 
E) business risk. 
A) financial leverage. 
B) production leverage. 
C) operating leverage. 
D) total asset turnover risk. 
E) business risk.

Question 5

CTO Transport has an aftertax cost of debt of 5.6 percent,a cost of equity of 13.7 percent,and a cost of preferred stock of 7.8 percent.The firm has 60,000 shares of common stock outstanding at a market price of $45 a share.There are 12,000 shares of preferred stock outstanding at a market price of $52 a share.The bond issue has a total face value of $400,000 and sells at 102 percent of face value.The tax rate is 35 percent.What is the company's WACC?

Accepted Answer

A) 11.83% 
B) 12.06% 
C) 12.42% 
D) 11.39% 
E) 10.87% 
A) 11.83% 
B) 12.06% 
C) 12.42% 
D) 11.39% 
E) 10.87%

Question 6

The terminal value of a company is based on which one of these assumptions?

Accepted Answer

A) The growth rate of the future cash flows will exceed the company's WACC. 
B) All future cash flows will be constant. 
C) The cash flows after Time T will diminish on an annual basis. 
D) The cash flows will increase in the future at a constant perpetual rate. 
E) The company will be sold at Time T for the stated terminal value. 
A) The growth rate of the future cash flows will exceed the company's WACC. 
B) All future cash flows will be constant. 
C) The cash flows after Time T will diminish on an annual basis. 
D) The cash flows will increase in the future at a constant perpetual rate. 
E) The company will be sold at Time T for the stated terminal value.

Question 7

Which one of these statements related to beta is correct?

Accepted Answer

A) A firm with a given sales cyclicality can reduce its beta by replacing variable production costs with fixed costs. 
B) The beta of debt is generally assumed to equal the market beta. 
C) Highly cyclical stocks tend to have low betas. 
D) The levered beta of equity exceeds the asset beta. 
E) Stocks with a high variance must have a high beta. 
A) A firm with a given sales cyclicality can reduce its beta by replacing variable production costs with fixed costs. 
B) The beta of debt is generally assumed to equal the market beta. 
C) Highly cyclical stocks tend to have low betas. 
D) The levered beta of equity exceeds the asset beta. 
E) Stocks with a high variance must have a high beta.

Question 8

Assume an all-equity company is considering expanding its current operations by increasing the size of its warehouse.The discount rate used for this project should be the

Accepted Answer

A) market rate of return. 
B) company's cost of equity capital. 
C) discount rate used when the company expanded into a new high-risk product line. 
D) lowest discount rate the company assigned to any project over the past 2 years. 
E) company's cost of debt. 
A) market rate of return. 
B) company's cost of equity capital. 
C) discount rate used when the company expanded into a new high-risk product line. 
D) lowest discount rate the company assigned to any project over the past 2 years. 
E) company's cost of debt.

Question 9

In a changing interest rate environment,the cost of new debt

Accepted Answer

A) is assumed to be zero for a levered firm. 
B) is equal to the embedded cost of old debt. 
C) generally exceeds the cost of equity on a pretax basis. 
D) is equal to the cost of borrowing. 
E) increases when taxes are considered. 
A) is assumed to be zero for a levered firm. 
B) is equal to the embedded cost of old debt. 
C) generally exceeds the cost of equity on a pretax basis. 
D) is equal to the cost of borrowing. 
E) increases when taxes are considered.

Question 10

Wilson's is reviewing a project with an internal rate of return of 13.09 percent and a beta of 1.42.The market risk premium is 8.1 percent,the tax rate is 35 percent,and the risk-free rate is 2.9 percent.The firm's WACC is 12.68 percent.Will the project be accepted if the WACC is used as the discount rate for the project? Should the project be accepted according to the CAPM,and why or why not?

Accepted Answer

A) Yes;No,since the CAPM return of 14.40 percent exceeds the IRR. 
B) Yes;Yes,since the project plots above the security market line. 
C) Yes;Yes,since the CAPM of 10.28 percent is less than the IRR. 
D) No;Yes,since the project plots above the security market line. 
E) No;No,since the project plots below the security market line. 
A) Yes;No,since the CAPM return of 14.40 percent exceeds the IRR. 
B) Yes;Yes,since the project plots above the security market line. 
C) Yes;Yes,since the CAPM of 10.28 percent is less than the IRR. 
D) No;Yes,since the project plots above the security market line. 
E) No;No,since the project plots below the security market line.

Question 11

The Flying Dove has 1,600 bonds outstanding with a $1,000 par value,a coupon rate of 5.5 percent,12 years to maturity,annual interest payments,and a market price equal to par.The firm also has 52,000 shares of common stock outstanding at a price per share of $43 and a beta of 1.3.The risk-free rate is 3 percent,the market risk premium is 7 percent,and the tax rate is 35 percent.What is the company's WACC?

Accepted Answer

A) 8)54% 
B) 10.51% 
C) 9)82% 
D) 9)37% 
E) 7)38% 
A) 8)54% 
B) 10.51% 
C) 9)82% 
D) 9)37% 
E) 7)38%

Question 12

The beta of a security provides an estimate of the

Accepted Answer

A) characteristic line for the security. 
B) slope of the capital market line. 
C) slope of the security market line. 
D) the market risk premium. 
E) total risk of the individual security. 
A) characteristic line for the security. 
B) slope of the capital market line. 
C) slope of the security market line. 
D) the market risk premium. 
E) total risk of the individual security.

Question 13

Southwest Tours needs $134,000 for a new project.The firm has a target capital structure of 25 percent debt and 75 percent equity.The flotation cost of debt is 5.4 percent compared to 8.6 percent for equity.What amount does the firm need to raise if it generates sufficient internal equity to cover the equity need?

Accepted Answer

A) $145,336.23 
B) $136,211.17 
C) $135,833.76 
D) $149,497.79 
E) $139,674.09 
A) $145,336.23 
B) $136,211.17 
C) $135,833.76 
D) $149,497.79 
E) $139,674.09

Question 14

Zee's Toy Store needs $242,000 for expansion.The firm has a target capital structure of 45 percent debt and 55 percent external equity.The flotation cost of debt is 5.2 percent compared to 8.5 percent for equity.What amount does the firm need to raise to fund the expansion?

Accepted Answer

A) $301,773.00 
B) $299,716.00 
C) $260,257.03 
D) $233,333.33 
E) $286,111.75 
A) $301,773.00 
B) $299,716.00 
C) $260,257.03 
D) $233,333.33 
E) $286,111.75

Question 15

A firm has net income of $21,350,depreciation of $2,780,interest of $640,and taxes of $10,990.The EBITDA multiple is 10.2.What is the value of the firm?

Accepted Answer

A) $378,820 
B) $364,752 
C) $341,008 
D) $353,860 
E) $341,214 
A) $378,820 
B) $364,752 
C) $341,008 
D) $353,860 
E) $341,214

Question 16

If you have returns on a security and also on the market,you can estimate beta using

Accepted Answer

A) the capital asset pricing model. 
B) the dividend discount model. 
C) standard deviation. 
D) variance. 
E) regression analysis. 
A) the capital asset pricing model. 
B) the dividend discount model. 
C) standard deviation. 
D) variance. 
E) regression analysis.

Question 17

Which one of these statements is correct?

Accepted Answer

A) ROE as used in the estimation of g is defined as a firm's earnings divided by the market value of its equity. 
B) The DDM requires a short-term estimate of dividend growth. 
C) Academics generally prefer the DDM over the CAPM. 
D) The DDM seems to have more estimation error than the CAPM. 
E) Measurement error in the estimate of the growth rate of dividends increases as you move from a single security to the overall market. 
A) ROE as used in the estimation of g is defined as a firm's earnings divided by the market value of its equity. 
B) The DDM requires a short-term estimate of dividend growth. 
C) Academics generally prefer the DDM over the CAPM. 
D) The DDM seems to have more estimation error than the CAPM. 
E) Measurement error in the estimate of the growth rate of dividends increases as you move from a single security to the overall market.

Question 18

A firm has an EBIT of $41,300,depreciation of $1,200,interest of $850,and taxes of $210.The EBITDA multiple is 9.6.What is the value of the firm?

Accepted Answer

A) $378,800 
B) $307,300 
C) $392,340 
D) $408,000 
E) $387,200 
A) $378,800 
B) $307,300 
C) $392,340 
D) $408,000 
E) $387,200

Question 19

The use of WACC as the discount rate when evaluating a project is acceptable when the

Accepted Answer

A) company is well established and financially stable. 
B) WACC produces a positive NPV. 
C) risk of the project is equal to the company's overall level of risk. 
D) company is well diversified and the unsystematic risk is negligible. 
E) project has only systematic risk. 
A) company is well established and financially stable. 
B) WACC produces a positive NPV. 
C) risk of the project is equal to the company's overall level of risk. 
D) company is well diversified and the unsystematic risk is negligible. 
E) project has only systematic risk.

Question 20

NuPress Valet has a proposed investment with an initial cost of $62 million and cash flows of $12.5 million for 5 years.Debt represents 44 percent of the capital structure.The cost of equity is 13.7 percent,the pretax cost of debt is 8.5 percent,and the tax rate is 34 percent.What is the company's WACC?

Accepted Answer

A) 9)93% 
B) 9)12% 
C) 10.14% 
D) 10.25% 
E) 9)75% 
A) 9)93% 
B) 9)12% 
C) 10.14% 
D) 10.25% 
E) 9)75%

What value should you assign as the flotation cost of internally generated equity financing?

Asian Foods needs $110,000 for a new project.The firm has a target capital structure of 30 percent debt and 70 percent external equity.The flotation cost of debt is 5.25 percent compared to 10.15 percent for equity.What amount does the firm need to raise?

A company's cost of debt will decrease when

The use of debt is called

The terminal value of a company is based on which one of these assumptions?

Which one of these statements related to beta is correct?

Assume an all-equity company is considering expanding its current operations by increasing the size of its warehouse.The discount rate used for this project should be the

In a changing interest rate environment,the cost of new debt

The beta of a security provides an estimate of the

Zee's Toy Store needs $242,000 for expansion.The firm has a target capital structure of 45 percent debt and 55 percent external equity.The flotation cost of debt is 5.2 percent compared to 8.5 percent for equity.What amount does the firm need to raise to fund the expansion?

A firm has net income of $21,350,depreciation of $2,780,interest of $640,and taxes of $10,990.The EBITDA multiple is 10.2.What is the value of the firm?

If you have returns on a security and also on the market,you can estimate beta using

Which one of these statements is correct?

A firm has an EBIT of $41,300,depreciation of $1,200,interest of $850,and taxes of $210.The EBITDA multiple is 9.6.What is the value of the firm?

The use of WACC as the discount rate when evaluating a project is acceptable when the

Introduction to Corporate Finance

Financial Statements AMCQ Cash Flow

Financial Statements Analysis Amcq Financial Models

Discounted Cash Flow Valuation

Interest Rates AMCQ Bomcq Valuation

Stock Valuation

Net Present Value AMCQ Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, AMCQ Capital Budgeting

Risk Amcq Return: Lessons From Market History

Return Amcq Risk: the Capital Asset Pricing Model Capm

Efficient Capital Markets Amcq Behavioral Challenges

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividemcqs AMCQ Other Payouts

Options Amcq Corporate Finance

Short-Term Finance Amcq Planning

Raising Capital

International Corporate Finance

Mergers Amcq Acquisitions Web Only

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Exam 12: Risk, cost of Capital, AMCQ Valuation

What value should you assign as the flotation cost of internally generated equity financing?

Asian Foods needs $110,000 for a new project.The firm has a target capital structure of 30 percent debt and 70 percent external equity.The flotation cost of debt is 5.25 percent compared to 10.15 percent for equity.What amount does the firm need to raise?

A company's cost of debt will decrease when

The use of debt is called

The terminal value of a company is based on which one of these assumptions?

Which one of these statements related to beta is correct?

Assume an all-equity company is considering expanding its current operations by increasing the size of its warehouse.The discount rate used for this project should be the

In a changing interest rate environment,the cost of new debt

The beta of a security provides an estimate of the

Zee's Toy Store needs $242,000 for expansion.The firm has a target capital structure of 45 percent debt and 55 percent external equity.The flotation cost of debt is 5.2 percent compared to 8.5 percent for equity.What amount does the firm need to raise to fund the expansion?

A firm has net income of $21,350,depreciation of $2,780,interest of $640,and taxes of $10,990.The EBITDA multiple is 10.2.What is the value of the firm?

If you have returns on a security and also on the market,you can estimate beta using

Which one of these statements is correct?

A firm has an EBIT of $41,300,depreciation of $1,200,interest of $850,and taxes of $210.The EBITDA multiple is 9.6.What is the value of the firm?

The use of WACC as the discount rate when evaluating a project is acceptable when the

Introduction to Corporate Finance

Financial Statements AMCQ Cash Flow

Financial Statements Analysis Amcq Financial Models

Discounted Cash Flow Valuation

Interest Rates AMCQ Bomcq Valuation

Stock Valuation

Net Present Value AMCQ Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, AMCQ Capital Budgeting

Risk Amcq Return: Lessons From Market History

Return Amcq Risk: the Capital Asset Pricing Model Capm

Efficient Capital Markets Amcq Behavioral Challenges

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividemcqs AMCQ Other Payouts

Options Amcq Corporate Finance

Short-Term Finance Amcq Planning

Raising Capital

International Corporate Finance

Mergers Amcq Acquisitions Web Only

Filters