As a consultant to Basso Inc. ,you have been provided with the following data: D1 = $0.67;P0 = $27.50;and gL = 8.00% (constant).What is the cost of common from reinvested earnings based on the dividend growth approach?

A) 9.42% B) 9.91% C) 10.44% D) 10.96% E) 11.51% A) 9.42% B) 9.91% C) 10.44% D) 10.96% E) 11.51%

Exam 9: The Cost of Capital

The reason why reinvested earnings have a cost equal to r_s is because investors think they can (i.e. ,expect to)earn r_s on investments with the same risk as the firm's common stock,and if the firm does not think that it can earn r_s on the earnings that it retains,it should distribute those earnings to its investors.Thus,the cost of reinvested earnings is based on the opportunity cost principle.

(True/False)

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Question 61

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 62

Burnham Brothers Inc.has no retained earnings since it has always paid out all of its earnings as dividends.This same situation is expected to persist in the future.The company uses the CAPM to calculate its cost of equity,and its target capital structure consists of common stock,preferred stock,and debt.Which of the following events would REDUCE its WACC?

(Multiple Choice)

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Question 63

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 64

If investors' aversion to risk rose,causing the slope of the SML to increase,this would have a greater impact on the required rate of return on equity,r_s,than on the interest rate on long-term debt,r_d,for most firms.Other things held constant,this would lead to an increase in the use of debt and a decrease in the use of equity.However,other things would not stay constant if firms used a lot more debt,as that would increase the riskiness of both debt and equity and thus limit the shift toward debt.

(True/False)

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Question 65

Which of the following statements is CORRECT? Assume that the firm is a publicly-owned corporation and is seeking to maximize shareholder wealth.

(Multiple Choice)

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Question 66

The component costs of capital are market-determined variables in the sense that they are based on investors' required returns.

(True/False)

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Question 67

The text identifies three methods for estimating the cost of common stock from reinvested earnings (not newly issued stock): the CAPM method,the dividend growth method,and the bond-yield-plus-risk-premium method.However,only the dividend growth method is widely used in practice.

(True/False)

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Question 68

A company's perpetual preferred stock currently sells for $92.50 per share,and it pays an $8.00 annual dividend.If the company were to sell a new preferred issue,it would incur a flotation cost of 5.00% of the issue price.What is the firm's cost of preferred stock?

(Multiple Choice)

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Question 69

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 70

The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends received by a corporation may be excluded from the receiving corporation's taxable income.

(True/False)

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Question 71

Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them,and no flotation costs are required to raise them,but capital raised by selling new stock or bonds does have a cost.

(True/False)

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Question 72

Refer to the data for the Collins Group.Based on the CAPM,what is the firm's cost of common stock?

(Multiple Choice)

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Question 73

The cost of debt,r_d,is normally less than r_s,so r_d(1 − T)will normally be much less than r_s.Therefore,as long as the firm is not completely debt financed,the weighted average cost of capital (WACC)will normally be greater than r_d(1 − T).

(True/False)

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Question 74

Which of the following statements is CORRECT? Assume a company's target capital structure is 50% debt and 50% common equity.

(Multiple Choice)

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Question 75

The president and CFO of Spellman Transportation are having a disagreement about whether to use market value or book value weights in calculating the WACC.Spellman's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%.This debt currently has a market value of $50 million.The company has 10 million shares of common stock,and the book value of the common equity (common stock plus retained earnings)is $65 million.The current stock price is $22.50 per share;stockholders' required return,r_s,is 14.00%;and the firm's tax rate is 40%.The CFO thinks the WACC should be based on market value weights,but the president thinks book weights are more appropriate.What is the difference between these two WACCs?

(Multiple Choice)

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Question 76

If a firm's marginal tax rate is increased,this would,other things held constant,lower the cost of debt used to calculate its WACC.

(True/False)

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Question 77

As a consultant to Basso Inc. ,you have been provided with the following data: D₁ = $0.67;P₀ = $27.50;and g_L = 8.00% (constant).What is the cost of common from reinvested earnings based on the dividend growth approach?

(Multiple Choice)

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Question 78

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 79

Refer to the data for the Collins Group.What is the best estimate of the firm's WACC?

(Multiple Choice)

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Question 80

Showing 61 - 80 of 91

Exam 9: The Cost of Capital

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT? Assume that the firm is a publicly-owned corporation and is seeking to maximize shareholder wealth.

The component costs of capital are market-determined variables in the sense that they are based on investors' required returns.

The text identifies three methods for estimating the cost of common stock from reinvested earnings (not newly issued stock): the CAPM method,the dividend growth method,and the bond-yield-plus-risk-premium method.However,only the dividend growth method is widely used in practice.

A company's perpetual preferred stock currently sells for $92.50 per share,and it pays an $8.00 annual dividend.If the company were to sell a new preferred issue,it would incur a flotation cost of 5.00% of the issue price.What is the firm's cost of preferred stock?

Which of the following statements is CORRECT?

The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends received by a corporation may be excluded from the receiving corporation's taxable income.

Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them,and no flotation costs are required to raise them,but capital raised by selling new stock or bonds does have a cost.

Refer to the data for the Collins Group.Based on the CAPM,what is the firm's cost of common stock?

The cost of debt,rd,is normally less than rs,so rd(1 − T)will normally be much less than rs.Therefore,as long as the firm is not completely debt financed,the weighted average cost of capital (WACC)will normally be greater than rd(1 − T).

Which of the following statements is CORRECT? Assume a company's target capital structure is 50% debt and 50% common equity.

If a firm's marginal tax rate is increased,this would,other things held constant,lower the cost of debt used to calculate its WACC.

As a consultant to Basso Inc. ,you have been provided with the following data: D1 = $0.67;P0 = $27.50;and gL = 8.00% (constant).What is the cost of common from reinvested earnings based on the dividend growth approach?

Which of the following statements is CORRECT?

Refer to the data for the Collins Group.What is the best estimate of the firm's WACC?

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

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Financial Options and Applications in Corporate Finance

The Basics of Capital Budgeting: Evaluating Cash Flows

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Financial Planning and Applications to Corporate Valuation

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Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

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Dynamic Capital Structures and Corporate Valuation

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The cost of debt,r_d,is normally less than r_s,so r_d(1 − T)will normally be much less than r_s.Therefore,as long as the firm is not completely debt financed,the weighted average cost of capital (WACC)will normally be greater than r_d(1 − T).

As a consultant to Basso Inc. ,you have been provided with the following data: D₁ = $0.67;P₀ = $27.50;and g_L = 8.00% (constant).What is the cost of common from reinvested earnings based on the dividend growth approach?