Question 1

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

Accepted Answer

A) 90 days 
B) 180 days 
C) 10 years 
D) 30 years 
A) 90 days 
B) 180 days 
C) 10 years 
D) 30 years

Question 2

Use the following information to answer the following question(s).
The current market price of an existing debt issue is $1,125.The bonds have a $1,000 par value,pay interest annually at a 12% coupon rate,and mature in 10 years.The firm has a marginal tax rate of 34%.
-The before-tax cost of this debt issue is

Accepted Answer

A) 12%. 
B) 7.92%. 
C) 9.97%. 
D) 13%. 
A) 12%. 
B) 7.92%. 
C) 9.97%. 
D) 13%.

Question 3

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 4

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

Accepted Answer

A) 62.5%. 
B) 66.7%. 
C) 6.25%. 
D) 38.1%. 
A) 62.5%. 
B) 66.7%. 
C) 6.25%. 
D) 38.1%.

Question 5

Because issuing common equity entails less risk to the firm,it is always less expensive than borrowing.

Accepted Answer

A) True 
 B)False

Question 6

Pony Corporation is undertaking a capital budgeting analysis.The firm's beta is 1.5.The rate on 10-year U.S.Treasury bonds is 5%,and the return on the S & P 500 index is 12%.What is the cost of Pony's common equity?

Accepted Answer

A) 13.3% 
B) 15.5% 
C) 17.7% 
D) 19.9% 
A) 13.3% 
B) 15.5% 
C) 17.7% 
D) 19.9%

Question 7

Lott Bros Developers evaluates a great many small to medium size projects each year.Some are riskier than others.Lott Bros should probably

Accepted Answer

A) allow individual project managers to estimate their own discount rates. 
B) try to identify the specific funding sources for each project. 
C) use the company's overall WACC for all projects. 
D) spend a great deal of time and money to estimate discount rates for each project. 
A) allow individual project managers to estimate their own discount rates. 
B) try to identify the specific funding sources for each project. 
C) use the company's overall WACC for all projects. 
D) spend a great deal of time and money to estimate discount rates for each project.

Question 8

Which of the following is a good reason to use divisional costs of capital?

Accepted Answer

A) Division managers have no vested interest in underestimating the capital costs associated with their division. 
B) Divisional costs of capital reduce are relatively easy to estimate. 
C) Comparison firms are often engaged in various lines of business. 
D) The divisions of a company represent well-defined lines of business with different risk characteristics,for example oil and gas exploration and distribution through pipelines. 
A) Division managers have no vested interest in underestimating the capital costs associated with their division. 
B) Divisional costs of capital reduce are relatively easy to estimate. 
C) Comparison firms are often engaged in various lines of business. 
D) The divisions of a company represent well-defined lines of business with different risk characteristics,for example oil and gas exploration and distribution through pipelines.

Question 9

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 10

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

Accepted Answer

A) by subjectively adjusting the company's WACC up or down. 
B) by estimating individual costs of capital for each individual project. 
C) by estimating individual costs of capital for each division or unit of the company. 
D) by identifying the specific sources of funding used by each division or unit. 
A) by subjectively adjusting the company's WACC up or down. 
B) by estimating individual costs of capital for each individual project. 
C) by estimating individual costs of capital for each division or unit of the company. 
D) by identifying the specific sources of funding used by each division or unit.

Question 11

Flotation costs increase the amount of funds that must be raised to finance an investment.

Accepted Answer

A) True 
 B)False

Question 12

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 13

Tropical Fruit Drinks issued $10,000,000 in bonds to expand its production facilities.After issuing the bonds,the company was 60% debt financed and 40% common equity financed.Tropical intends to retire 20% of the bonds each year for the next 5 years and not to issue any new debt.

Accepted Answer

A) All things equal,we would expect Tropical Fruit Drinks cost of capital to decrease gradually over the next 5 years. 
B) All things equal,we would expect Tropical Fruit Drinks cost of capital to increase gradually over the next 5 years. 
C) All things equal,we would expect Tropical Fruit Drinks cost of capital to stay the same for the next 5 years,then decrease rapidly. 
D) All things equal,we would expect Tropical Fruit Drinks cost of capital to stay the same for the next five years,then increase rapidly. 
A) All things equal,we would expect Tropical Fruit Drinks cost of capital to decrease gradually over the next 5 years. 
B) All things equal,we would expect Tropical Fruit Drinks cost of capital to increase gradually over the next 5 years. 
C) All things equal,we would expect Tropical Fruit Drinks cost of capital to stay the same for the next 5 years,then decrease rapidly. 
D) All things equal,we would expect Tropical Fruit Drinks cost of capital to stay the same for the next five years,then increase rapidly.

Question 14

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 dividend-growth model is

Accepted Answer

A) 11.00%. 
B) 11.32%. 
C) 11.50%. 
D) 11.72%. 
A) 11.00%. 
B) 11.32%. 
C) 11.50%. 
D) 11.72%.

Question 15

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 16

Discuss the primary advantages of the CAPM approach in determining the cost of common equity.

Accepted Answer

There are two primary advantages of usin

Question 17

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 18

A firm's capital structure consists of which of the following?

Accepted Answer

A) Common stock 
B) Preferred stock 
C) Bonds 
D) All of the above 
A) Common stock 
B) Preferred stock 
C) Bonds 
D) All of the above

Question 19

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

Accepted Answer

A) flotation costs 
B) the investor's required rate of return 
C) the stock price 
D) the tax rate 
A) flotation costs 
B) the investor's required rate of return 
C) the stock price 
D) the tax rate

Question 20

The cost of capital is

Accepted Answer

A) the opportunity cost of using funds to invest in new projects. 
B) the rate of return the firm must earn on its investments in order to satisfy the required rate of return of the firm's investors. 
C) the required rate of return for new capital investments which have typical or average risk. 
D) all of the above. 
A) the opportunity cost of using funds to invest in new projects. 
B) the rate of return the firm must earn on its investments in order to satisfy the required rate of return of the firm's investors. 
C) the required rate of return for new capital investments which have typical or average risk. 
D) all of the above.

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

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

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

Because issuing common equity entails less risk to the firm,it is always less expensive than borrowing.

Pony Corporation is undertaking a capital budgeting analysis.The firm's beta is 1.5.The rate on 10-year U.S.Treasury bonds is 5%,and the return on the S & P 500 index is 12%.What is the cost of Pony's common equity?

Lott Bros Developers evaluates a great many small to medium size projects each year.Some are riskier than others.Lott Bros should probably

Which of the following is a good reason to use divisional costs of capital?

Cost of capital is

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

Flotation costs increase the amount of funds that must be raised to finance an investment.

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.

Tropical Fruit Drinks issued $10,000,000 in bonds to expand its production facilities.After issuing the bonds,the company was 60% debt financed and 40% common equity financed.Tropical intends to retire 20% of the bonds each year for the next 5 years and not to issue any new debt.

The most expensive source of capital is usually

Discuss the primary advantages of the CAPM approach in determining the cost of common equity.

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

A firm's capital structure consists of which of the following?

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

The cost of capital is

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

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

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

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

Because issuing common equity entails less risk to the firm,it is always less expensive than borrowing.

Pony Corporation is undertaking a capital budgeting analysis.The firm's beta is 1.5.The rate on 10-year U.S.Treasury bonds is 5%,and the return on the S & P 500 index is 12%.What is the cost of Pony's common equity?

Lott Bros Developers evaluates a great many small to medium size projects each year.Some are riskier than others.Lott Bros should probably

Which of the following is a good reason to use divisional costs of capital?

Cost of capital is

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

Flotation costs increase the amount of funds that must be raised to finance an investment.

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.

Tropical Fruit Drinks issued $10,000,000 in bonds to expand its production facilities.After issuing the bonds,the company was 60% debt financed and 40% common equity financed.Tropical intends to retire 20% of the bonds each year for the next 5 years and not to issue any new debt.

The most expensive source of capital is usually

Discuss the primary advantages of the CAPM approach in determining the cost of common equity.

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

A firm's capital structure consists of which of the following?

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

The cost of capital is

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