Question 1

Which answer appropriately ranks the securities according to seniority risk, from highest risk first to lowest risk last?

Accepted Answer

A) common stock, bonds, preferred stock 
B) preferred stock, common stock, bonds 
C) common stock, preferred stock, bonds 
D) bonds, preferred stock, common stock 
A) common stock, bonds, preferred stock 
B) preferred stock, common stock, bonds 
C) common stock, preferred stock, bonds 
D) bonds, preferred stock, common stock

Question 2

A firm's weighted average cost of capital is a marginal measurement meaning it is concerned with measuring the cost of funds already raised and previously invested in the firm.

Accepted Answer

A) True 
 B)False

Question 3

The cost of external equity is greater than the cost of internal equity because

Accepted Answer

A) it decreases the earnings per share. 
B) it increases the market price of the stock. 
C) dividends are increased. 
D) of the flotation or issuance costs. 
A) it decreases the earnings per share. 
B) it increases the market price of the stock. 
C) dividends are increased. 
D) of the flotation or issuance costs.

Question 4

Young's Specialized Cruises plans to issue preferred stock at a price of $25 per share. The annual dividend will be $2.18 per share and issuance costs are expected to be $2.00 per share. What is the cost of raising funds with preferred stock for Young?

Accepted Answer

A) 8.72% 
B) 9.48% 
C) 8.76% 
D) 8.00% 
A) 8.72% 
B) 9.48% 
C) 8.76% 
D) 8.00%

Question 5

The cost of raising capital with debt is typically less costly for a firm than raising capital with preferred stock. Which one of the following is one of the reasons for this?

Accepted Answer

A) Preferred stocks are more senior than bonds. 
B) Interest is a tax-deductible cost, preferred dividends are not. 
C) Bonds generally have a longer maturity than preferred stocks. 
D) The interest from bonds is compounded more frequently than the dividends from preferred stocks. 
A) Preferred stocks are more senior than bonds. 
B) Interest is a tax-deductible cost, preferred dividends are not. 
C) Bonds generally have a longer maturity than preferred stocks. 
D) The interest from bonds is compounded more frequently than the dividends from preferred stocks.

Question 6

Funds raised by the issuance of preferred stock are not considered part of a firm's capital.

Accepted Answer

A) True 
 B)False

Question 7

A firm's weighted average cost of capital should not do which one of the following?

Accepted Answer

A) measure the cost of short-term sources of funds 
B) measure cost on a marginal basis 
C) measure cost on an after-tax basis 
D) measure the cost of long-term sources of funds 
A) measure the cost of short-term sources of funds 
B) measure cost on a marginal basis 
C) measure cost on an after-tax basis 
D) measure the cost of long-term sources of funds

Question 8

The weights in a firm's weighted average cost of capital should be a measure of the firm's target capital structure.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following should not be included in a firm's cost of capital estimation?

Accepted Answer

A) the cost of permanent sources of short-term debt 
B) the cost of common stock 
C) the cost of retained earnings 
D) the cost of seasonal sources of short-term debt 
A) the cost of permanent sources of short-term debt 
B) the cost of common stock 
C) the cost of retained earnings 
D) the cost of seasonal sources of short-term debt

Question 10

Dou's Oriental Hotels, Incorporated sold an issue of 10-year bonds. The bonds sold at $995 each. After issuance costs, Dou's Oriental Hotels received $985 each. The maturity value is $1,000 each and the coupon rate is 7 5/8% and paid annually. What is the after-tax cost of debt for these bonds if Dou's Oriental Hotels' marginal tax rate is 40%?

Accepted Answer

A) 7.70% 
B) 4.62% 
C) 7.85% 
D) 4.71% 
A) 7.70% 
B) 4.62% 
C) 7.85% 
D) 4.71%

Which answer appropriately ranks the securities according to seniority risk, from highest risk first to lowest risk last?

A firm's weighted average cost of capital is a marginal measurement meaning it is concerned with measuring the cost of funds already raised and previously invested in the firm.

The cost of external equity is greater than the cost of internal equity because

Young's Specialized Cruises plans to issue preferred stock at a price of $25 per share. The annual dividend will be $2.18 per share and issuance costs are expected to be $2.00 per share. What is the cost of raising funds with preferred stock for Young?

The cost of raising capital with debt is typically less costly for a firm than raising capital with preferred stock. Which one of the following is one of the reasons for this?

Funds raised by the issuance of preferred stock are not considered part of a firm's capital.

A firm's weighted average cost of capital should not do which one of the following?

The weights in a firm's weighted average cost of capital should be a measure of the firm's target capital structure.

Which of the following should not be included in a firm's cost of capital estimation?

Introduction

Financial Markets and Financial Instruments

Review of Financial Statements and Selected Ratios

The Relationship Between Risk and Return

Time Value of Money

Fixed Income Securities: Bonds and Preferred Stock

Common Stock

Introduction to Capital Budgeting and Cash Flow Estimation

Capital Budgeting Decision Methods

An Introduction to Hotel Valuation

Capital Structure

Filters

Exam 8: Cost of Capital

Which answer appropriately ranks the securities according to seniority risk, from highest risk first to lowest risk last?

A firm's weighted average cost of capital is a marginal measurement meaning it is concerned with measuring the cost of funds already raised and previously invested in the firm.

The cost of external equity is greater than the cost of internal equity because

Young's Specialized Cruises plans to issue preferred stock at a price of $25 per share. The annual dividend will be $2.18 per share and issuance costs are expected to be $2.00 per share. What is the cost of raising funds with preferred stock for Young?

The cost of raising capital with debt is typically less costly for a firm than raising capital with preferred stock. Which one of the following is one of the reasons for this?

Funds raised by the issuance of preferred stock are not considered part of a firm's capital.

A firm's weighted average cost of capital should not do which one of the following?

The weights in a firm's weighted average cost of capital should be a measure of the firm's target capital structure.

Which of the following should not be included in a firm's cost of capital estimation?

Introduction

Financial Markets and Financial Instruments

Review of Financial Statements and Selected Ratios

The Relationship Between Risk and Return

Time Value of Money

Fixed Income Securities: Bonds and Preferred Stock

Common Stock

Introduction to Capital Budgeting and Cash Flow Estimation

Capital Budgeting Decision Methods

An Introduction to Hotel Valuation

Capital Structure

Filters