Question 1

For a typical corporation,which of the following capital structures will result in the lowest weighted average cost of capital?

Accepted Answer

A)  40% debt, 20% preferred stock, 40% common equity 
B)  50% debt, 10% preferred stock, 40% common equity 
C)  60% debt, 10% preferred stock, 30% common equity 
D)  60% debt, 15% preferred stock, 25% common equity 
A)  40% debt, 20% preferred stock, 40% common equity 
B)  50% debt, 10% preferred stock, 40% common equity 
C)  60% debt, 10% preferred stock, 30% common equity 
D)  60% debt, 15% preferred stock, 25% common equity

Question 2

The after-tax cost of equity equals one minus the marginal tax rate times the required rate of return on common stock.

Accepted Answer

A) True 
 B)False

Question 3

All else equal,an increase in beta results in

Accepted Answer

A)  an increase in the cost of retained earnings. 
B)  an increase in the cost of newly issued common stock . 
C)  an increase in the after-tax cost of debt. 
D)  an increase in the cost of common equity, whether or not the funds come from retained earnings or newly issued common stock. 
A)  an increase in the cost of retained earnings. 
B)  an increase in the cost of newly issued common stock . 
C)  an increase in the after-tax cost of debt. 
D)  an increase in the cost of common equity, whether or not the funds come from retained earnings or newly issued common stock.

Question 4

Dickerson Corporation's common stock is currently selling for $38.Last year's dividend was $4.00 per share.Investors expect dividends to grow at an annual rate of 7 percent indefinitely.Flotation costs of 4% will be incurred when new stock is sold.
a.What is the cost of internal common equity?
b.What is the cost of new common equity?

Accepted Answer

a.D₁ = $4.00 × 1.07 = $4.28 Cos

Question 5

Office Clean Corporation has a capital structure consisting of 30 percent debt and 70 percent common equity.Assuming the capital structure is optimal,what amount of total investment can be financed by a $35 million addition to retained earnings without selling new common stock?

Accepted Answer

Capital bu

Question 6

The average cost associated with each additional dollar of financing for investment projects is

Accepted Answer

A)  the incremental return. 
B)  the marginal cost of capital. 
C)  CAPM required return. 
D)  the component cost of capital. 
A)  the incremental return. 
B)  the marginal cost of capital. 
C)  CAPM required return. 
D)  the component cost of capital.

Question 7

The ABC Company is planning a $64 million expansion.The expansion is to be financed by selling $25.6 million in new debt and $38.4 million in new common stock.The before-tax required rate of return on debt is 9 percent and the required rate of return on equity is 14 percent.If the company is in the 35 percent tax bracket,what is the firm's cost of capital?

Accepted Answer

A)  8.92% 
B)  9.89% 
C)  11.50% 
D)  10.74% 
A)  8.92% 
B)  9.89% 
C)  11.50% 
D)  10.74%

Question 8

In capital budgeting analysis,when computing the weighted average cost of capital,the CAPM approach is typically used to find which of the following?

Accepted Answer

A)  Market value weight of equity 
B)  Pretax component cost of debt 
C)  After-tax component cost of debt 
D)  Component cost of internal equity 
A)  Market value weight of equity 
B)  Pretax component cost of debt 
C)  After-tax component cost of debt 
D)  Component cost of internal equity

Question 9

Cost of capital is commonly used interchangeably with all of the following terms except:

Accepted Answer

A)  the firm's required rate of return. 
B)  the hurdle rate for new investments. 
C)  the internal rate of return for new investments. 
D)  the firm's opportunity cost of funds. 
A)  the firm's required rate of return. 
B)  the hurdle rate for new investments. 
C)  the internal rate of return for new investments. 
D)  the firm's opportunity cost of funds.

Question 10

NewLinePhone Corp.is very risky,with a beta equal to 2.8 and a standard deviation of returns of 32%.The risk free rate of return is 3% and the market risk premium is 8%.NewLinePhone's marginal tax rate is 35%.Use the capital asset pricing model to estimate NewLinePhone's cost of retained earnings.

Accepted Answer

3% + (8%)(

Question 11

A U.S.company can borrow 12,000 pounds in Great Britain for 4% interest,paying back 12,480 pounds in one year.Alternatively,the U.S.company can borrow an equivalent amount of U.S dollars in the United States and pay 8% interest.Assuming capital markets are efficient,estimate the expected inflation rate in the United States if inflation in Great Britain is expected to be zero.

Accepted Answer

A)  5.02% 
B)  4.16% 
C)  4.00% 
D)  3.85% 
A)  5.02% 
B)  4.16% 
C)  4.00% 
D)  3.85%

Question 12

Five Rivers Casino is undergoing a major expansion.The expansion will be financed by issuing new 15-year,$1,000 par,9% annual coupon bonds.The market price of the bonds is $1,070 each.Gamblers flotation expense on the new bonds will be $50 per bond.Gamblers marginal tax rate is 35%.What is the pre-tax cost of debt for the newly-issued bonds?

Accepted Answer

A)  8.76% 
B)  8.12% 
C)  7.49% 
D)  10.25% 
A)  8.76% 
B)  8.12% 
C)  7.49% 
D)  10.25%

Question 13

Using the weighted average cost of capital as the required rate of return for every project will

Accepted Answer

A)  cause a firm to reject projects that should have been accepted. 
B)  cause a firm to accept projects that were too risky. 
C)  result in maximization of shareholder wealth. 
D)  A and B above. 
A)  cause a firm to reject projects that should have been accepted. 
B)  cause a firm to accept projects that were too risky. 
C)  result in maximization of shareholder wealth. 
D)  A and B above.

Question 14

The cost of debt increases relative to the investor's required return due to flotation costs,but decreases relative to the investor's required return due to the tax deductibility of interest.

Accepted Answer

A) True 
 B)False

Question 15

Five Rivers Casino is undergoing a major expansion.The expansion will be financed by issuing new 15-year,$1,000 par,9% annual coupon bonds.The market price of the bonds is $1,070 each.Five Rivers flotation expense on the new bonds will be $50 per bond.Five Rivers marginal tax rate is 35%.What is the relevant cost of the new bonds for capital budgeting purposes?

Accepted Answer

A)  5.14% 
B)  5.69% 
C)  8.45% 
D)  4.82% 
A)  5.14% 
B)  5.69% 
C)  8.45% 
D)  4.82%

For a typical corporation,which of the following capital structures will result in the lowest weighted average cost of capital?

The after-tax cost of equity equals one minus the marginal tax rate times the required rate of return on common stock.

All else equal,an increase in beta results in

Office Clean Corporation has a capital structure consisting of 30 percent debt and 70 percent common equity.Assuming the capital structure is optimal,what amount of total investment can be financed by a $35 million addition to retained earnings without selling new common stock?

The average cost associated with each additional dollar of financing for investment projects is

In capital budgeting analysis,when computing the weighted average cost of capital,the CAPM approach is typically used to find which of the following?

Cost of capital is commonly used interchangeably with all of the following terms except:

NewLinePhone Corp.is very risky,with a beta equal to 2.8 and a standard deviation of returns of 32%.The risk free rate of return is 3% and the market risk premium is 8%.NewLinePhone's marginal tax rate is 35%.Use the capital asset pricing model to estimate NewLinePhone's cost of retained earnings.

Using the weighted average cost of capital as the required rate of return for every project will

The cost of debt increases relative to the investor's required return due to flotation costs,but decreases relative to the investor's required return due to the tax deductibility of interest.

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

For a typical corporation,which of the following capital structures will result in the lowest weighted average cost of capital?

The after-tax cost of equity equals one minus the marginal tax rate times the required rate of return on common stock.

All else equal,an increase in beta results in

Office Clean Corporation has a capital structure consisting of 30 percent debt and 70 percent common equity.Assuming the capital structure is optimal,what amount of total investment can be financed by a $35 million addition to retained earnings without selling new common stock?

The average cost associated with each additional dollar of financing for investment projects is

In capital budgeting analysis,when computing the weighted average cost of capital,the CAPM approach is typically used to find which of the following?

Cost of capital is commonly used interchangeably with all of the following terms except:

NewLinePhone Corp.is very risky,with a beta equal to 2.8 and a standard deviation of returns of 32%.The risk free rate of return is 3% and the market risk premium is 8%.NewLinePhone's marginal tax rate is 35%.Use the capital asset pricing model to estimate NewLinePhone's cost of retained earnings.

Using the weighted average cost of capital as the required rate of return for every project will

The cost of debt increases relative to the investor's required return due to flotation costs,but decreases relative to the investor's required return due to the tax deductibility of interest.

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