Question 1

As long as the firm issues no new debt,changes in interest rates will have no effect on the cost of capital.

Accepted Answer

A) True 
 B)False

Question 2

Briefly identify and describe some important uses of a firm's weighted average cost of capital.

Accepted Answer

The WACC is used to establish the value

Question 3

The opportunity cost of securities issued by a firm is determined by

Accepted Answer

A) the rate of return investors could earn on riskless securities. 
B) the rate of return on the firm's next best investment opportunity. 
C) the rate of return investors could obtain on similar securities. 
D) the weighted average rate of return on all securities issued by the firm. 
A) the rate of return investors could earn on riskless securities. 
B) the rate of return on the firm's next best investment opportunity. 
C) the rate of return investors could obtain on similar securities. 
D) the weighted average rate of return on all securities issued by the firm.

Question 4

In most instances,as the amount of debt rises,the common stockholders will decrease their required rate of return.

Accepted Answer

A) True 
 B)False

Question 5

Flotation costs are higher for debt than for equity because debt creates more risk to the issuer.

Accepted Answer

A) True 
 B)False

Question 6

Vipsu Corporation plans to issue 10-year bonds with a par value of $1,000 that will pay $55 every six months.The net amount of capital to the firm from the sale of each bond is $840.68.If Vipsu is in the 25% tax bracket,what is the after-tax cost of debt?

Accepted Answer

Find the present value factors that equa

Question 7

Capital structure represents the mix of equity and interest-bearing debt used by a firm.

Accepted Answer

A) True 
 B)False

Question 8

Sutter Corporation's common stock is selling for $16.80 a share.Last year,Sutter paid a dividend of $.80.Investors are expecting Sutter's dividends to grow at a rate of 5% per year.What is the cost of common equity?

Accepted Answer

K_c = (D1/Po)+ 6 = [$80(1.05)/16.80] + .05

Question 9

A project with a positive NPV may have a negative NPV when flotation costs are considered.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

The investor's required rate of return differs from the firm's cost of capital due to the

Accepted Answer

A) firm's beta. 
B) tax deductibility of interest. 
C) CAPM. 
D) time value of money. 
A) firm's beta. 
B) tax deductibility of interest. 
C) CAPM. 
D) time value of money.

Question 12

Use the following information to answer the following question(s).
The following data concerning
Spencer Transgenics' capital structure is available.
  
-The percentage of preferred stock in Spencer's weighted average cost of capital is

Accepted Answer

A) 5.9%. 
B) 62.5%. 
C) 4.76%. 
D) 6.25%. 
A) 5.9%. 
B) 62.5%. 
C) 4.76%. 
D) 6.25%.

Question 13

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 14

Alpha has an outstanding bond issue that has a 7.75% semiannual coupon,a current maturity of 20 years,and sells for $967.97.The firm's income tax rate is 40%.What should Alpha use as an after-tax cost of debt for cost of capital purposes?

Accepted Answer

A) 2.42% 
B) 4.04% 
C) 4.85% 
D) 8.08% 
A) 2.42% 
B) 4.04% 
C) 4.85% 
D) 8.08%

Question 15

Using separate cost of capital estimates for individual projects is not appropriate when the projects are relatively few in number and large in scale.

Accepted Answer

A) True 
 B)False

Question 16

Business risk reflects the added variability in earnings available to a firm's shareholders.

Accepted Answer

A) True 
 B)False

Question 17

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 18

The expected dividend is $2.50 for a share of stock priced at $25.What is the cost of common equity if the long-term growth in dividends is projected to be 4%?

Accepted Answer

A) 10% 
B) 8% 
C) 14% 
D) 18% 
A) 10% 
B) 8% 
C) 14% 
D) 18%

Question 19

The WACC should be computed using

Accepted Answer

A) balance sheet weights and target yields. 
B) weights based on the firm's ideal capital structure and target yields on debt and equity. 
C) market weights and opportunity costs to the firm. 
D) market weights and opportunity costs to investors. 
A) balance sheet weights and target yields. 
B) weights based on the firm's ideal capital structure and target yields on debt and equity. 
C) market weights and opportunity costs to the firm. 
D) market weights and opportunity costs to investors.

Question 20

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

Accepted Answer

A) True 
 B)False

As long as the firm issues no new debt,changes in interest rates will have no effect on the cost of capital.

Briefly identify and describe some important uses of a firm's weighted average cost of capital.

The opportunity cost of securities issued by a firm is determined by

In most instances,as the amount of debt rises,the common stockholders will decrease their required rate of return.

Flotation costs are higher for debt than for equity because debt creates more risk to the issuer.

Vipsu Corporation plans to issue 10-year bonds with a par value of $1,000 that will pay $55 every six months.The net amount of capital to the firm from the sale of each bond is $840.68.If Vipsu is in the 25% tax bracket,what is the after-tax cost of debt?

Capital structure represents the mix of equity and interest-bearing debt used by a firm.

Sutter Corporation's common stock is selling for $16.80 a share.Last year,Sutter paid a dividend of $.80.Investors are expecting Sutter's dividends to grow at a rate of 5% per year.What is the cost of common equity?

A project with a positive NPV may have a negative NPV when flotation costs are considered.

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 investor's required rate of return differs from the firm's cost of capital due to the

Use the following information to answer the following question(s). The following data concerning Spencer Transgenics' capital structure is available. -The percentage of preferred stock in Spencer's weighted average cost of capital is

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?

Alpha has an outstanding bond issue that has a 7.75% semiannual coupon,a current maturity of 20 years,and sells for $967.97.The firm's income tax rate is 40%.What should Alpha use as an after-tax cost of debt for cost of capital purposes?

Using separate cost of capital estimates for individual projects is not appropriate when the projects are relatively few in number and large in scale.

Business risk reflects the added variability in earnings available to a firm's shareholders.

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?

The expected dividend is $2.50 for a share of stock priced at $25.What is the cost of common equity if the long-term growth in dividends is projected to be 4%?

The WACC should be computed using

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

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

As long as the firm issues no new debt,changes in interest rates will have no effect on the cost of capital.

Briefly identify and describe some important uses of a firm's weighted average cost of capital.

The opportunity cost of securities issued by a firm is determined by

In most instances,as the amount of debt rises,the common stockholders will decrease their required rate of return.

Flotation costs are higher for debt than for equity because debt creates more risk to the issuer.

Vipsu Corporation plans to issue 10-year bonds with a par value of $1,000 that will pay $55 every six months.The net amount of capital to the firm from the sale of each bond is $840.68.If Vipsu is in the 25% tax bracket,what is the after-tax cost of debt?

Capital structure represents the mix of equity and interest-bearing debt used by a firm.

Sutter Corporation's common stock is selling for $16.80 a share.Last year,Sutter paid a dividend of $.80.Investors are expecting Sutter's dividends to grow at a rate of 5% per year.What is the cost of common equity?

A project with a positive NPV may have a negative NPV when flotation costs are considered.

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 investor's required rate of return differs from the firm's cost of capital due to the

Use the following information to answer the following question(s). The following data concerning Spencer Transgenics' capital structure is available. -The percentage of preferred stock in Spencer's weighted average cost of capital is

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?

Alpha has an outstanding bond issue that has a 7.75% semiannual coupon,a current maturity of 20 years,and sells for $967.97.The firm's income tax rate is 40%.What should Alpha use as an after-tax cost of debt for cost of capital purposes?

Using separate cost of capital estimates for individual projects is not appropriate when the projects are relatively few in number and large in scale.

Business risk reflects the added variability in earnings available to a firm's shareholders.

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?

The expected dividend is $2.50 for a share of stock priced at $25.What is the cost of common equity if the long-term growth in dividends is projected to be 4%?

The WACC should be computed using

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

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