Question 1

The firm financed completely with equity capital has a cost of capital equal to the required return on common stock.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is NOT a good reason to use divisional costs of capital?

Accepted Answer

A) Divisional costs of capital require less time and effort to estimate than individual project costs of capital. 
B) Divisional costs of capital reduce the latitude of divisional managers in deciding which projects to accept. 
C) Divisional costs of capital reflect differences in the systematic risk of projects evaluated by different divisions. 
D) Divisional costs of capital may be estimated by comparing divisions to the most similar free standing companies which may have different capital structures. 
A) Divisional costs of capital require less time and effort to estimate than individual project costs of capital. 
B) Divisional costs of capital reduce the latitude of divisional managers in deciding which projects to accept. 
C) Divisional costs of capital reflect differences in the systematic risk of projects evaluated by different divisions. 
D) Divisional costs of capital may be estimated by comparing divisions to the most similar free standing companies which may have different capital structures.

Question 3

Gibson Industries is issuing a $1,000 par value bond with an 8% semi-annual interest coupon rate and that matures in 11 years.Investors are willing to pay $972 for these bonds.Gibson is in the 34% tax bracket.What will be the after-tax cost of debt of the bond?

Accepted Answer

Using a financial calculator,N

Question 4

The proportion of debt in this firm's capital structure is:

Accepted Answer

A) 40%. 
B) 50%. 
C) 60%. 
D) 70%. 
A) 40%. 
B) 50%. 
C) 60%. 
D) 70%.

Question 5

Tantasqua Paper Products is composed of 3 divisions: industrial paper products,commercial paper products,and a forestry division which grows trees for wood pulp used in the paper-making process.Each of these divisions takes on a large number of projects with differing risk characteristics.Tantasqua now uses a single discount rate based on the company's WACC to evaluate all capital budgeting proposals.Discuss the advantages and disadvantages of this approach.

Accepted Answer

The single discount rate approach minimi

Question 6

Sola Cola Corporation is undertaking a capital budgeting analysis.The rate on 10-year U.S.Treasury bonds is 3.60%,and the return on the S & P 500 index is 11.6%.If the cost of Sola Cola's common equity is 19.6%,calculate their beta.

Accepted Answer

A) 1.69 
B) 5.4 
C) 2.0 
D) 1.38 
A) 1.69 
B) 5.4 
C) 2.0 
D) 1.38

Question 7

As the size of a financing issue increases,the ________ usually decreases on a percentage basis.

Accepted Answer

A) cost of equity 
B) flotation cost of the issue 
C) effective tax rate 
D) both A and B 
A) cost of equity 
B) flotation cost of the issue 
C) effective tax rate 
D) both A and B

Question 8

Only a small minority of bonds issued by large corporations are rated by Moody's or S&P.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is the preferred method in estimating a firm's cost of capital?

Accepted Answer

A) Consider the cost of a specific source of financing that will be used for a firm's new projects;i.e. ,the marginal cost of capital. 
B) Calculate the weighted average cost of new capital to be utilized in financing a firm's projects. 
C) Calculate the firm's weighted average CAPM to be utilized in financing a firm's projects. 
D) All of the above are equally acceptable. 
A) Consider the cost of a specific source of financing that will be used for a firm's new projects;i.e. ,the marginal cost of capital. 
B) Calculate the weighted average cost of new capital to be utilized in financing a firm's projects. 
C) Calculate the firm's weighted average CAPM to be utilized in financing a firm's projects. 
D) All of the above are equally acceptable.

Question 10

Which of the following best describes a firm's cost of capital?

Accepted Answer

A) The average yield to maturity on debt 
B) The average cost of the firm's assets 
C) The rate of return that must be earned on its investments in order to satisfy the firm's investors 
D) The coupon rate on preferred stock 
A) The average yield to maturity on debt 
B) The average cost of the firm's assets 
C) The rate of return that must be earned on its investments in order to satisfy the firm's investors 
D) The coupon rate on preferred stock

Question 11

The after-tax cost of common stock is:

Accepted Answer

A) 14.67%. 
B) 13.23%. 
C) 12.41%. 
D) 11.65%. 
A) 14.67%. 
B) 13.23%. 
C) 12.41%. 
D) 11.65%.

Question 12

A firm's weighted marginal cost of capital increases when internal equity financing is exhausted but is unaffected by an increase in the cost of other financing sources.

Accepted Answer

A) True 
 B)False

Question 13

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 percentage of debt in Grafton's weighted average cost of capital is:

Accepted Answer

A) 38.1%. 
B) 25%. 
C) 31.25%. 
D) 57.14%. 
A) 38.1%. 
B) 25%. 
C) 31.25%. 
D) 57.14%.

Question 14

Flotation costs are usually ignored when computing the NPV of projects financed with newly issued securities.

Accepted Answer

A) True 
 B)False

Question 15

Capital structure represents the mix of long-term sources of funds used by a firm.

Accepted Answer

A) True 
 B)False

Question 16

The preferred stock of Wells Co.sells for $15.30 and pays a $1.75 dividend.What is the cost of capital for preferred stock?

Accepted Answer

Cost of preferred st

Question 17

Cost of capital is:

Accepted Answer

A) the coupon rate of debt. 
B) a minimum rate of return set by the board of directors. 
C) the rate of return that must be earned on additional investment if firm value is to remain unchanged. 
D) the average cost of the firm's assets. 
A) the coupon rate of debt. 
B) a minimum rate of return set by the board of directors. 
C) the rate of return that must be earned on additional investment if firm value is to remain unchanged. 
D) the average cost of the firm's assets.

Question 18

The most expensive source of capital is usually:

Accepted Answer

A) preferred stock. 
B) new common stock. 
C) debt. 
D) retained earnings. 
A) preferred stock. 
B) new common stock. 
C) debt. 
D) retained earnings.

Question 19

Jen and Barry's Ice Cream needs $20 million in new capital to expand its production facilities.It will use 40% debt and 60% equity.The company's after-tax cost of debt is 5% and the cost of equity is 12.5%.Flotation costs will be 3% for debt and 9% for equity.What is the total amount of capital that will need to be raised to finance the expansion project?

Accepted Answer

A) $22,386,000 
B) $20,000,000 
C) $21,200.000 
D) $21,413,276 
A) $22,386,000 
B) $20,000,000 
C) $21,200.000 
D) $21,413,276

Question 20

The CAPM approach is used to determine the cost of:

Accepted Answer

A) debt. 
B) preferred stock. 
C) common equity. 
D) long term funds. 
A) debt. 
B) preferred stock. 
C) common equity. 
D) long term funds.

The firm financed completely with equity capital has a cost of capital equal to the required return on common stock.

Which of the following is NOT a good reason to use divisional costs of capital?

Gibson Industries is issuing a $1,000 par value bond with an 8% semi-annual interest coupon rate and that matures in 11 years.Investors are willing to pay $972 for these bonds.Gibson is in the 34% tax bracket.What will be the after-tax cost of debt of the bond?

The proportion of debt in this firm's capital structure is:

Sola Cola Corporation is undertaking a capital budgeting analysis.The rate on 10-year U.S.Treasury bonds is 3.60%,and the return on the S & P 500 index is 11.6%.If the cost of Sola Cola's common equity is 19.6%,calculate their beta.

As the size of a financing issue increases,the ________ usually decreases on a percentage basis.

Only a small minority of bonds issued by large corporations are rated by Moody's or S&P.

Which of the following is the preferred method in estimating a firm's cost of capital?

Which of the following best describes a firm's cost of capital?

The after-tax cost of common stock is:

A firm's weighted marginal cost of capital increases when internal equity financing is exhausted but is unaffected by an increase in the cost of other financing sources.

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 percentage of debt in Grafton's weighted average cost of capital is:

Flotation costs are usually ignored when computing the NPV of projects financed with newly issued securities.

Capital structure represents the mix of long-term sources of funds used by a firm.

The preferred stock of Wells Co.sells for $15.30 and pays a $1.75 dividend.What is the cost of capital for preferred stock?

Cost of capital is:

The most expensive source of capital is usually:

The CAPM approach is used to determine the cost of:

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters

Exam 14: The Cost of Capital

The firm financed completely with equity capital has a cost of capital equal to the required return on common stock.

Which of the following is NOT a good reason to use divisional costs of capital?

Gibson Industries is issuing a $1,000 par value bond with an 8% semi-annual interest coupon rate and that matures in 11 years.Investors are willing to pay $972 for these bonds.Gibson is in the 34% tax bracket.What will be the after-tax cost of debt of the bond?

The proportion of debt in this firm's capital structure is:

Sola Cola Corporation is undertaking a capital budgeting analysis.The rate on 10-year U.S.Treasury bonds is 3.60%,and the return on the S & P 500 index is 11.6%.If the cost of Sola Cola's common equity is 19.6%,calculate their beta.

As the size of a financing issue increases,the ________ usually decreases on a percentage basis.

Only a small minority of bonds issued by large corporations are rated by Moody's or S&P.

Which of the following is the preferred method in estimating a firm's cost of capital?

Which of the following best describes a firm's cost of capital?

The after-tax cost of common stock is:

A firm's weighted marginal cost of capital increases when internal equity financing is exhausted but is unaffected by an increase in the cost of other financing sources.

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 percentage of debt in Grafton's weighted average cost of capital is:

Flotation costs are usually ignored when computing the NPV of projects financed with newly issued securities.

Capital structure represents the mix of long-term sources of funds used by a firm.

The preferred stock of Wells Co.sells for $15.30 and pays a $1.75 dividend.What is the cost of capital for preferred stock?

Cost of capital is:

The most expensive source of capital is usually:

The CAPM approach is used to determine the cost of:

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters