Question 1

The after-tax cost of debt is equal to one minus the marginal tax rate times the yield to maturity on the firm's outstanding debt.

Accepted Answer

A) True 
 B)False

Question 2

A firm's cost of capital is influenced by

Accepted Answer

A)  the current ratio. 
B)  par value of common stock. 
C)  capital structure. 
D)  net income. 
A)  the current ratio. 
B)  par value of common stock. 
C)  capital structure. 
D)  net income.

Question 3

If preferred stock pays a $5 annual dividend and sells for $50 the cost of preferred stock financing is 10% since dividends are not tax deductible and preferred stock is sold without flotation costs.

Accepted Answer

A) True 
 B)False

Question 4

Corporations have two costs of common equity,one for retained earnings and one if the company issues new common stock.

Accepted Answer

A) True 
 B)False

Question 5

Ewer Firm will finance a proposed investment by issuing new securities while maintaining its optimal capital structure of 60% debt and 40% equity.The firm can issue bonds at a price of $950.00 before $15 flotation costs.The 10-year bonds will have an annual coupon rate of 8% and a face value of $1,000.The company can issue new equity at a before-tax cost of 16% and its marginal tax rate is 34%.What is the appropriate cost of capital to use in analyzing this project?

Accepted Answer

A)  3.63% 
B)  8.77% 
C)  9.97% 
D)  11.81% 
A)  3.63% 
B)  8.77% 
C)  9.97% 
D)  11.81%

Question 6

Which of the following should not be considered when calculating a firm's WACC?

Accepted Answer

A)  Cost of preferred stock 
B)  After-tax cost of bonds 
C)  Cost of common stock 
D)  Cost of carrying inventory 
A)  Cost of preferred stock 
B)  After-tax cost of bonds 
C)  Cost of common stock 
D)  Cost of carrying inventory

Question 7

Kelly Corporation will issue new common stock to finance an expansion.The existing common stock just paid a $1.50 dividend,and dividends are expected to grow at a constant rate 8% indefinitely.The stock sells for $45,and flotation expenses of 5% of the selling price will be incurred on new shares.What is the cost of retained earnings for Kelly Corp.?

Accepted Answer

A)  11.33% 
B)  11.51% 
C)  11.60% 
D)  11.79% 
E)  12.53% 
A)  11.33% 
B)  11.51% 
C)  11.60% 
D)  11.79% 
E)  12.53%

Question 8

A firm's cost of capital is the required rate of return on the firm's average project.

Accepted Answer

A) True 
 B)False

Question 9

If a firm were to earn exactly its cost of capital,we would expect the price of its common stock to remain unchanged.

Accepted Answer

A) True 
 B)False

Question 10

According to interest rate parity theory,differences in observed nominal interest rates in two countries should equal differences in the expected rates of inflation in the two countries.

Accepted Answer

A) True 
 B)False

Question 11

Seafood Products Corp.is expected to pay a dividend of $2.60 next year.Dividends are expected to grow at a constant rate of 8% per year,and the stock price is currently $20.00.New stock can be sold at this price subject to flotation costs of 15%.The company's marginal tax rate is 35%.Compute the cost of internal equity (retained earnings)and the cost of external equity (new common stock),respectively.

Accepted Answer

A)  0, 21.00% 
B)  8.00%, 23.29% 
C)  21.00%, 23.29% 
D)  23.00%, 25.48% 
A)  0, 21.00% 
B)  8.00%, 23.29% 
C)  21.00%, 23.29% 
D)  23.00%, 25.48%

Question 12

Two factors that cause the investor's required rate of return to differ from the company's cost of capital are

Accepted Answer

A)  taxes and risk. 
B)  transactions costs and risk. 
C)  taxes and transactions costs. 
D)  risk and opportunity cost differences. 
A)  taxes and risk. 
B)  transactions costs and risk. 
C)  taxes and transactions costs. 
D)  risk and opportunity cost differences.

Question 13

Calculating the cost of capital for divisions within a company is not recommended because the data is too fragmented and all divisions are part of the same company in any case.

Accepted Answer

A) True 
 B)False

Question 14

The interest rate on a one year security in the United States is 3%,while the interest rate on a one year security in German is 8%.If the current exchange rate is 1 EURO = $1.50,then the future exchange rate in one year,according to the international Fisher effect,is

Accepted Answer

A)  $1.431. 
B)  $1.425. 
C)  $1.575. 
D)  $1.385. 
A)  $1.431. 
B)  $1.425. 
C)  $1.575. 
D)  $1.385.

Question 15

An increase in a corporation's marginal tax rate will cause the corporation's after tax cost of debt to increase,other things remaining the same.

Accepted Answer

A) True 
 B)False

Question 16

KayCee Manufacturing Company paid a dividend yesterday of $3.50 per share.The dividend is expected to grow at a constant rate of 10% per year.The price of KayCee's common stock today is $40 per share.If Kaycee decides to issue new common stock,flotation costs will equal $4.00 per share.Kaycee's marginal tax rate is 35%.Based on the above information,the cost of new common stock is

Accepted Answer

A)  26.41%. 
B)  20.09%. 
C)  19.63%. 
D)  17.55%. 
A)  26.41%. 
B)  20.09%. 
C)  19.63%. 
D)  17.55%.

Question 17

The firm's best financial structure is determined by finding the capital structure that minimizes the firm's cost of capital.

Accepted Answer

A) True 
 B)False

Question 18

New Jet Airlines plans to issue 14-year bonds with a par value of $1,000 that will pay $60 every six months.The bonds have a market price of $1,220.Flotation costs on new debt will be 4% of the selling price.If the firm has a 35% marginal tax bracket,compute the following:
a.Yield to maturity of debt
b.After-tax cost of existing debt
c.After-tax cost of new debt

Accepted Answer

a.YTM = 9.18% (Using Yield Function in E

Question 19

Glenna Gayle common stock sells for $55,and dividends paid last year were $1.35.Flotation costs on issuing stock will be 8% of the market price.The dividends are predicted to have a 10% growth rate.What is the cost of internal equity,and new equity,respectively for Glenna Gayle?

Accepted Answer

D₁ = $1.35 × 1.1 = $1.49 Cost o

Question 20

Which of the following differentiates the cost of retained earnings from the cost of newly-issued common stock?

Accepted Answer

A)  The cost of the pre-emptive rights held by existing shareholders. 
B)  The greater marginal tax rate faced by the now-larger firm. 
C)  The flotation costs incurred when issuing new securities. 
D)  The larger dividends paid to the new common stockholders. 
A)  The cost of the pre-emptive rights held by existing shareholders. 
B)  The greater marginal tax rate faced by the now-larger firm. 
C)  The flotation costs incurred when issuing new securities. 
D)  The larger dividends paid to the new common stockholders.

The after-tax cost of debt is equal to one minus the marginal tax rate times the yield to maturity on the firm's outstanding debt.

A firm's cost of capital is influenced by

If preferred stock pays a $5 annual dividend and sells for $50 the cost of preferred stock financing is 10% since dividends are not tax deductible and preferred stock is sold without flotation costs.

Corporations have two costs of common equity,one for retained earnings and one if the company issues new common stock.

Which of the following should not be considered when calculating a firm's WACC?

A firm's cost of capital is the required rate of return on the firm's average project.

If a firm were to earn exactly its cost of capital,we would expect the price of its common stock to remain unchanged.

According to interest rate parity theory,differences in observed nominal interest rates in two countries should equal differences in the expected rates of inflation in the two countries.

Two factors that cause the investor's required rate of return to differ from the company's cost of capital are

Calculating the cost of capital for divisions within a company is not recommended because the data is too fragmented and all divisions are part of the same company in any case.

The interest rate on a one year security in the United States is 3%,while the interest rate on a one year security in German is 8%.If the current exchange rate is 1 EURO = $1.50,then the future exchange rate in one year,according to the international Fisher effect,is

An increase in a corporation's marginal tax rate will cause the corporation's after tax cost of debt to increase,other things remaining the same.

The firm's best financial structure is determined by finding the capital structure that minimizes the firm's cost of capital.

Glenna Gayle common stock sells for $55,and dividends paid last year were $1.35.Flotation costs on issuing stock will be 8% of the market price.The dividends are predicted to have a 10% growth rate.What is the cost of internal equity,and new equity,respectively for Glenna Gayle?

Which of the following differentiates the cost of retained earnings from the cost of newly-issued common stock?

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

Current Asset Management

International Business Finance

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Exam 9: The Cost of Capital

The after-tax cost of debt is equal to one minus the marginal tax rate times the yield to maturity on the firm's outstanding debt.

A firm's cost of capital is influenced by

If preferred stock pays a $5 annual dividend and sells for $50 the cost of preferred stock financing is 10% since dividends are not tax deductible and preferred stock is sold without flotation costs.

Corporations have two costs of common equity,one for retained earnings and one if the company issues new common stock.

Which of the following should not be considered when calculating a firm's WACC?

A firm's cost of capital is the required rate of return on the firm's average project.

If a firm were to earn exactly its cost of capital,we would expect the price of its common stock to remain unchanged.

According to interest rate parity theory,differences in observed nominal interest rates in two countries should equal differences in the expected rates of inflation in the two countries.

Two factors that cause the investor's required rate of return to differ from the company's cost of capital are

Calculating the cost of capital for divisions within a company is not recommended because the data is too fragmented and all divisions are part of the same company in any case.

The interest rate on a one year security in the United States is 3%,while the interest rate on a one year security in German is 8%.If the current exchange rate is 1 EURO = $1.50,then the future exchange rate in one year,according to the international Fisher effect,is

An increase in a corporation's marginal tax rate will cause the corporation's after tax cost of debt to increase,other things remaining the same.

The firm's best financial structure is determined by finding the capital structure that minimizes the firm's cost of capital.

Glenna Gayle common stock sells for $55,and dividends paid last year were $1.35.Flotation costs on issuing stock will be 8% of the market price.The dividends are predicted to have a 10% growth rate.What is the cost of internal equity,and new equity,respectively for Glenna Gayle?

Which of the following differentiates the cost of retained earnings from the cost of newly-issued common stock?

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

Current Asset Management

International Business Finance

Filters