Question 1

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

Accepted Answer

A) bear less risk than common stockholders bear. 
B) have prior voting rights over common stockholders. 
C) receive greater returns than common stockholders. 
D) investors pay a lower tax rate on bond interest 
A) bear less risk than common stockholders bear. 
B) have prior voting rights over common stockholders. 
C) receive greater returns than common stockholders. 
D) investors pay a lower tax rate on bond interest

Question 2

Alpha's beta is 1.06,the present T-bond rate is 6%,and the return on the S & P 500 is 15.25%.What is Alpha's cost of common equity using the CAPM approach?

Accepted Answer

A) 21.25% 
B) 15.81% 
C) 9.25% 
D) 6.32% 
A) 21.25% 
B) 15.81% 
C) 9.25% 
D) 6.32%

Question 3

The cost of debt is equal to one minus the marginal tax rate times the coupon rate of interest on the firm's outstanding debt.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following must be adjusted for the firm's tax rate when estimating the weighted average cost of capital WACC?

Accepted Answer

A) Cost of common equity 
B) Cost of preferred stock 
C) Cost of debt 
D) All of the above 
A) Cost of common equity 
B) Cost of preferred stock 
C) Cost of debt 
D) All of the above

Question 5

A strong stock market and reasonably good earnings have caused the price of the firm's common stock to increase by 25%.

Accepted Answer

A) This will have no effect on the firm's cost of capital. 
B) All thing's equal,this will increase the firm's cost of capital. 
C) All thing's equal,this will lower the firm's cost of capital. 
D) This will only affect the cost of capital if the firm uses CAPM to compute the cost of equity. 
A) This will have no effect on the firm's cost of capital. 
B) All thing's equal,this will increase the firm's cost of capital. 
C) All thing's equal,this will lower the firm's cost of capital. 
D) This will only affect the cost of capital if the firm uses CAPM to compute the cost of equity.

Question 6

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

Accepted Answer

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

Question 7

Capital budgeting analyses typically assume a constant cost of capital,even though the analysts know it will change.One reason for this practice is that

Accepted Answer

A) the changes are too small to affect the decision. 
B) a constant cost of capital is the most conservative assumption. 
C) the changes are unpredictable. 
D) NPV calculations do not allow more than one discount rate. 
A) the changes are too small to affect the decision. 
B) a constant cost of capital is the most conservative assumption. 
C) the changes are unpredictable. 
D) NPV calculations do not allow more than one discount rate.

Question 8

All things equal,as the tax rate increases,the incentive to use more debt financing increases.

Accepted Answer

A) True 
 B)False

Question 9

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 switching to an approach based on separate discount rates for each division or even the risk level of each project.

Accepted Answer

Switching to multiple discount rates may

Question 10

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

Accepted Answer

A) book values in accord with generally accepted accounting principles. 
B) current market values for bonds,common stock,and preferred stock and book values for retained earnings. 
C) current market values. 
D) subjective adjustments for firm risk. 
A) book values in accord with generally accepted accounting principles. 
B) current market values for bonds,common stock,and preferred stock and book values for retained earnings. 
C) current market values. 
D) subjective adjustments for firm risk.

Question 11

Use the following information to answer the following question(s).
Berlioz Inc.is trying to estimate its cost of common equity,and it has the following information.The firm has a beta of 0.90,the before-tax cost of the firm's debt is 7.75%,and the firm estimates that the risk-free rate is 4% while the current market return is 12%.Berlioz stock currently sells for $35.00 per share.The firm pays dividends annually and expects dividends to grow at a constant rate of 5% indefinitely.The most recent dividend per share,paid yesterday,is $2.00.Finally,the firm has a marginal tax rate of 34%.
-The cost of common equity using the CAPM is

Accepted Answer

A) 11.00%. 
B) 11.20%. 
C) 11.50%. 
D) 11.72%. 
A) 11.00%. 
B) 11.20%. 
C) 11.50%. 
D) 11.72%.

Question 12

Based on current market values,Shawhan Supply 's capital structure is 30% debt,20% preferred stock,and 50% common stock.When using book values,capital structure is 25% debt,10% preferred stock,and 65% common stock.The required return on each component is: debt-10%;preferred stock-11%;and common stock-18%.The marginal tax rate is 40%.What rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged?

Accepted Answer

A) 18.0% 
B) 13.0% 
C) 10.0% 
D) 14.3% 
A) 18.0% 
B) 13.0% 
C) 10.0% 
D) 14.3%

Question 13

The last paid dividend is $2 for a share of common stock that is currently selling for $20.What is the cost of common equity if the long-term growth rate in dividends for the firm is expected to be 8%?

Accepted Answer

A) 10.8% 
B) 12.8% 
C) 14.8% 
D) 16.8% 
E) 18.8% 
A) 10.8% 
B) 12.8% 
C) 14.8% 
D) 16.8% 
E) 18.8%

Question 14

An increase in ________ will increase the cost of common equity.

Accepted Answer

A) the expected growth rate of dividends 
B) the risk-free rate 
C) the dividend 
D) both A and B 
A) the expected growth rate of dividends 
B) the risk-free rate 
C) the dividend 
D) both A and B

Question 15

A bond with a Moody's rating of Aaa and an S&P rating of AAA will have a higher required return than a bond with a Moody's rating of Aa1 and an S&P rating of AA+.

Accepted Answer

A) True 
 B)False

Question 16

The amount of debt in the firm's capital structure should include all interest-bearing debt,both long-term and short-term.

Accepted Answer

A) True 
 B)False

Question 17

XYZ Corporation is trying to determine the appropriate cost of preferred stock to use in determining the firm's cost of capital.This firm's preferred stock is currently selling for $29.89 and pays a perpetual annual dividend of $2.60 per share.Compute the cost of preferred stock for XYZ.

Accepted Answer

A) 7.2% 
B) 6.2% 
C) 8.7% 
D) 16.7% 
A) 7.2% 
B) 6.2% 
C) 8.7% 
D) 16.7%

Question 18

Walker & Son is issuing a 10-year,$1,000 par value bond that pays 9% interest annually.The bond is expected to sell for $885.What is Walker & Son's after-tax cost of debt if the firm is in the 34% tax bracket?

Accepted Answer

A) 7.23% 
B) 8.01% 
C) 9.15% 
D) 10.35% 
A) 7.23% 
B) 8.01% 
C) 9.15% 
D) 10.35%

Question 19

If the before-tax cost of debt is 9% and the firm has a 34% marginal tax rate,the after-tax cost of debt is 5.94%.

Accepted Answer

A) True 
 B)False

Question 20

The minimum rate of return necessary to attract an investor to purchase or hold a security is called the cost of capital.

Accepted Answer

A) True 
 B)False

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

Alpha's beta is 1.06,the present T-bond rate is 6%,and the return on the S & P 500 is 15.25%.What is Alpha's cost of common equity using the CAPM approach?

The cost of debt is equal to one minus the marginal tax rate times the coupon rate of interest on the firm's outstanding debt.

Which of the following must be adjusted for the firm's tax rate when estimating the weighted average cost of capital WACC?

A strong stock market and reasonably good earnings have caused the price of the firm's common stock to increase by 25%.

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

Capital budgeting analyses typically assume a constant cost of capital,even though the analysts know it will change.One reason for this practice is that

All things equal,as the tax rate increases,the incentive to use more debt financing increases.

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

The last paid dividend is $2 for a share of common stock that is currently selling for $20.What is the cost of common equity if the long-term growth rate in dividends for the firm is expected to be 8%?

An increase in ________ will increase the cost of common equity.

A bond with a Moody's rating of Aaa and an S&P rating of AAA will have a higher required return than a bond with a Moody's rating of Aa1 and an S&P rating of AA+.

The amount of debt in the firm's capital structure should include all interest-bearing debt,both long-term and short-term.

XYZ Corporation is trying to determine the appropriate cost of preferred stock to use in determining the firm's cost of capital.This firm's preferred stock is currently selling for $29.89 and pays a perpetual annual dividend of $2.60 per share.Compute the cost of preferred stock for XYZ.

Walker & Son is issuing a 10-year,$1,000 par value bond that pays 9% interest annually.The bond is expected to sell for $885.What is Walker & Son's after-tax cost of debt if the firm is in the 34% tax bracket?

If the before-tax cost of debt is 9% and the firm has a 34% marginal tax rate,the after-tax cost of debt is 5.94%.

The minimum rate of return necessary to attract an investor to purchase or hold a security is called the cost of capital.

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

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

Alpha's beta is 1.06,the present T-bond rate is 6%,and the return on the S & P 500 is 15.25%.What is Alpha's cost of common equity using the CAPM approach?

The cost of debt is equal to one minus the marginal tax rate times the coupon rate of interest on the firm's outstanding debt.

Which of the following must be adjusted for the firm's tax rate when estimating the weighted average cost of capital WACC?

A strong stock market and reasonably good earnings have caused the price of the firm's common stock to increase by 25%.

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

Capital budgeting analyses typically assume a constant cost of capital,even though the analysts know it will change.One reason for this practice is that

All things equal,as the tax rate increases,the incentive to use more debt financing increases.

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

The last paid dividend is $2 for a share of common stock that is currently selling for $20.What is the cost of common equity if the long-term growth rate in dividends for the firm is expected to be 8%?

An increase in ________ will increase the cost of common equity.

A bond with a Moody's rating of Aaa and an S&P rating of AAA will have a higher required return than a bond with a Moody's rating of Aa1 and an S&P rating of AA+.

The amount of debt in the firm's capital structure should include all interest-bearing debt,both long-term and short-term.

XYZ Corporation is trying to determine the appropriate cost of preferred stock to use in determining the firm's cost of capital.This firm's preferred stock is currently selling for $29.89 and pays a perpetual annual dividend of $2.60 per share.Compute the cost of preferred stock for XYZ.

Walker & Son is issuing a 10-year,$1,000 par value bond that pays 9% interest annually.The bond is expected to sell for $885.What is Walker & Son's after-tax cost of debt if the firm is in the 34% tax bracket?

If the before-tax cost of debt is 9% and the firm has a 34% marginal tax rate,the after-tax cost of debt is 5.94%.

The minimum rate of return necessary to attract an investor to purchase or hold a security is called the cost of capital.

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