Exam 14: The Cost of Capital

Alio e Olio has restaurants throughout the United States,Canada,and Western Europe.It is considering a proposal to open several restaurants in major cities of India and China.

Which of the following is a valid issue in implementing the dividend growth model? The model:

The average cost of capital is the appropriate rate to use when evaluating new investments,even though the new investments might be in a higher risk class.

Paramount,Inc.just paid a dividend of $2.05 per share,and the firm is expected to experience constant growth of 12.50% over the foreseeable future.The common stock is currently selling for $65.90 per share.What is Paramount's cost of retained earnings using the Dividend Growth Model approach?

Which of the following is a correct formula for calculating the cost of capital?

The weights used to determine the relative importance of the firm's sources of capital should reflect:

The cost of common equity using the CAPM is:

The weighted cost of capital assumes that the company maintains a constant debt to equity ratio.

14.2 Determining the Firm's Capital Structure Weights Use the following information to answer the following question(s). The following data concerning Grafton Computer Peripherals' capital structure is available. -The total capital that should be used in computing the weights for Grafton's WACC is:

Larger issues of new common stock can cause ________ to increase.

Large firms are most likely to adjust for differences in the risk levels of investments taken on by different parts of the firm:

Pilgrim's WACC is 12%.It has one opportunity to invest in a high risk project with an expected rate of return of 25%.It has another opportunity to lease a building to a government agency.The expected rate of return on the lease is 10%.

Most firms use Treasury securities with maturities of ________ to determine the appropriate risk-free rate to use in the CAPM.

The firm should continue to invest in new projects up to the point where the marginal rate of return earned on a new investment equals the marginal cost of new capital.

The firm's weighted average cost of capital is:

Which of the following reasons causes bonds to be a less expensive form of capital for a public firm than the issuance of common stock? Bondholders:

Many corporate finance professionals favor the CAPM for determining the cost of equity.Which of the following is a reason for this preference?

Which of the following statements is true?

The after-tax cost of debt is:

In calculating the cost of capital for an average firm,which of the following statements is true?