Question 1

The cost of retained earnings is generally higher than both the cost of debt and cost of preferred stock.

Accepted Answer

A) True 
 B)False

Question 2

What is the dividend on an 8 percent preferred stock that currently sells for $45 and has a face value of $50 per share?

Accepted Answer

A)  $3.33 
B)  $3.60 
C)  $4.00 
D)  $5.00 
A)  $3.33 
B)  $3.60 
C)  $4.00 
D)  $5.00

Question 3

Table 9.2
A firm has determined its optimal structure which is composed of the following sources and target market value proportions.   Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of $50.
Common Stock: A firm's common stock is currently selling for $75 per share. The dividend expected to be paid at the end of the coming year is $5. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent.
-The firm's after-tax cost of debt is ________. (See Table 9.2)

Accepted Answer

A)  4.6 percent 
B)  6 percent 
C)  7 percent 
D)  7.7 percent 
A)  4.6 percent 
B)  6 percent 
C)  7 percent 
D)  7.7 percent

Question 4

The cost of retained earnings will always equal the cost of preferred stock.

Accepted Answer

A) True 
 B)False

Question 5

Table 9.1
A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.   Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of
2 percent of the face value would be required in addition to the discount of $40.
Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in floatation costs. Additionally, the firm's marginal tax rate is 40 percent.
-If the target market proportion is reduced to 15 percent, what will be the revised weighted average cost of capital? (See Table 9.1)

Accepted Answer

A)  13.6 percent 
B)  11.0 percent 
C)  12.34 percent 
D)  10.4 percent 
A)  13.6 percent 
B)  11.0 percent 
C)  12.34 percent 
D)  10.4 percent

Question 6

Table 9.1
A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.   Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of
2 percent of the face value would be required in addition to the discount of $40.
Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in floatation costs. Additionally, the firm's marginal tax rate is 40 percent.
-The firm's cost of retained earnings is ________. (See Table 9.1)

Accepted Answer

A)  10.2 percent 
B)  13.9 percent 
C)  13.7 percent 
D)  13.6 percent 
A)  10.2 percent 
B)  13.9 percent 
C)  13.7 percent 
D)  13.6 percent

Question 7

Target weights are either book value or market value weights based on a firm's desired capital structure proportions.

Accepted Answer

A) True 
 B)False

Question 8

A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can ________.

Accepted Answer

A)  increase the proportion of long-term debt to decrease the cost of capital 
B)  increase the proportion of short-term debt to decrease the cost of capital 
C)  decrease the proportion of common stock equity to decrease financial risk 
D)  increase the proportion of common stock equity to decrease financial risk 
A)  increase the proportion of long-term debt to decrease the cost of capital 
B)  increase the proportion of short-term debt to decrease the cost of capital 
C)  decrease the proportion of common stock equity to decrease financial risk 
D)  increase the proportion of common stock equity to decrease financial risk

Question 9

The cost of preferred stock is the ratio of the preferred stock dividend to a firm's net proceeds from the sale of the preferred stock.

Accepted Answer

A) True 
 B)False

Question 10

The cost of capital acts as a major link between a firm's long-term investment decisions and the wealth of the firm's owners as determined by the market value of their shares.

Accepted Answer

A) True 
 B)False

Question 11

One measure of the cost of common stock equity is the rate at which investors discount the expected common stock dividends of the firm to determine its share value.

Accepted Answer

A) True 
 B)False

Question 12

A firm has common stock with a market price of $100 per share and an expected dividend of $5.61 per share at the end of the coming year. A new issue of stock is expected to be sold for $98, with $2 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total $1 per share. The dividends paid on the outstanding stock over the past five years are as follows:   The cost of this new issue of common stock is ________.

Accepted Answer

A)  5.8 percent 
B)  7.7 percent 
C)  10.8 percent 
D)  12.8 percent 
A)  5.8 percent 
B)  7.7 percent 
C)  10.8 percent 
D)  12.8 percent

Question 13

Target weights are either book value or market value weights based on actual historical capital structure proportions.

Accepted Answer

A) True 
 B)False

Question 14

A firm can retain more of its earnings if it can convince its stockholders that it will earn at least their required return on the reinvested funds.

Accepted Answer

A) True 
 B)False

Question 15

In general, floatation costs include two components, underwriting costs and administrative costs.

Accepted Answer

A) True 
 B)False

Question 16

Table 9.2
A firm has determined its optimal structure which is composed of the following sources and target market value proportions.   Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of $50.
Common Stock: A firm's common stock is currently selling for $75 per share. The dividend expected to be paid at the end of the coming year is $5. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent.
-The firm's before-tax cost of debt is ________. (See Table 9.2)

Accepted Answer

A)  7.7 percent 
B)  10.6 percent 
C)  11.2 percent 
D)  12.7 percent 
A)  7.7 percent 
B)  10.6 percent 
C)  11.2 percent 
D)  12.7 percent

Question 17

Historical weights are the present value of market price based on the actual historical capital structure proportions.

Accepted Answer

A) True 
 B)False

Question 18

The weighted average cost of capital represents the annual before-tax percentage cost of the debt.

Accepted Answer

A) True 
 B)False

Question 19

The Gordon model is based on the premise that the value of a share of stock is equal to sum of all future dividends it is expected to provide over an infinite time horizon.

Accepted Answer

A) True 
 B)False

Question 20

The cost of common stock equity may be estimated by using the ________.

Accepted Answer

A)  yield curve 
B)  break-even analysis 
C)  Gordon model 
D)  DuPont analysis 
A)  yield curve 
B)  break-even analysis 
C)  Gordon model 
D)  DuPont analysis

The cost of retained earnings is generally higher than both the cost of debt and cost of preferred stock.

What is the dividend on an 8 percent preferred stock that currently sells for $45 and has a face value of $50 per share?

The cost of retained earnings will always equal the cost of preferred stock.

Target weights are either book value or market value weights based on a firm's desired capital structure proportions.

A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can ________.

The cost of preferred stock is the ratio of the preferred stock dividend to a firm's net proceeds from the sale of the preferred stock.

The cost of capital acts as a major link between a firm's long-term investment decisions and the wealth of the firm's owners as determined by the market value of their shares.

One measure of the cost of common stock equity is the rate at which investors discount the expected common stock dividends of the firm to determine its share value.

Target weights are either book value or market value weights based on actual historical capital structure proportions.

A firm can retain more of its earnings if it can convince its stockholders that it will earn at least their required return on the reinvested funds.

In general, floatation costs include two components, underwriting costs and administrative costs.

Historical weights are the present value of market price based on the actual historical capital structure proportions.

The weighted average cost of capital represents the annual before-tax percentage cost of the debt.

The Gordon model is based on the premise that the value of a share of stock is equal to sum of all future dividends it is expected to provide over an infinite time horizon.

The cost of common stock equity may be estimated by using the ________.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters

Exam 9: The Cost of Capital

The cost of retained earnings is generally higher than both the cost of debt and cost of preferred stock.

What is the dividend on an 8 percent preferred stock that currently sells for $45 and has a face value of $50 per share?

The cost of retained earnings will always equal the cost of preferred stock.

Target weights are either book value or market value weights based on a firm's desired capital structure proportions.

A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can ________.

The cost of preferred stock is the ratio of the preferred stock dividend to a firm's net proceeds from the sale of the preferred stock.

The cost of capital acts as a major link between a firm's long-term investment decisions and the wealth of the firm's owners as determined by the market value of their shares.

One measure of the cost of common stock equity is the rate at which investors discount the expected common stock dividends of the firm to determine its share value.

Target weights are either book value or market value weights based on actual historical capital structure proportions.

A firm can retain more of its earnings if it can convince its stockholders that it will earn at least their required return on the reinvested funds.

In general, floatation costs include two components, underwriting costs and administrative costs.

Historical weights are the present value of market price based on the actual historical capital structure proportions.

The weighted average cost of capital represents the annual before-tax percentage cost of the debt.

The Gordon model is based on the premise that the value of a share of stock is equal to sum of all future dividends it is expected to provide over an infinite time horizon.

The cost of common stock equity may be estimated by using the ________.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters