Question 1

What type of adjustment to debt is in practice?

Accepted Answer

Most practitioners use net deb

Question 2

Anheuser Busch, a manufacturer of beverages, is planning to purchase Six Flags theme parks. Anheuser Busch should use the ________ to evaluate the business of Six Flags.

Accepted Answer

A)  WACC of Anheuser Busch 
B)  WACC of Six Flags 
C)  average market return 
D)  divisional cost of capital 
A)  WACC of Anheuser Busch 
B)  WACC of Six Flags 
C)  average market return 
D)  divisional cost of capital

Question 3

The costs of external financing must be deducted from the net present value (NPV) of a project to evaluate if it is worth undertaking.

Accepted Answer

A) True 
 B)False

Question 4

The outstanding debt of Berstin Corp. has ten years to maturity, a current yield of 7%, and a price of $95. What is the pretax cost of debt if the tax rate is 30%.

Accepted Answer

A)  4.9% 
B)  6.5% 
C)  7.0% 
D)  7.37% 
A)  4.9% 
B)  6.5% 
C)  7.0% 
D)  7.37%

Question 5

IBM expects to pay a dividend of $2 next year and expects these dividends to grow at 9% a year. The price of IBM is $80 per share. What is IBM's cost of equity capital?

Accepted Answer

A)  9.20% 
B)  10.35% 
C)  10.93% 
D)  11.50% 
A)  9.20% 
B)  10.35% 
C)  10.93% 
D)  11.50%

Question 6

Assume Bismuth Electronics has a book value of $6 billion of equity and a face value of $19.7 billion of debt. The market values of equity and debt are $2.5 billion and $18.5 billion. A Wall Street financial analyst determines values of equity and debt as $3 billion and $20 billion. Which of the following values should be used for calculating the firm's WACC?

Accepted Answer

A)  $6 billion of equity and $19.7 billion of debt 
B)  $2.5 billion of equity and $20 billion of debt 
C)  $3 billion of equity and $19.9 billion of debt 
D)  $2.5 billion of equity and $18.5 billion of debt 
A)  $6 billion of equity and $19.7 billion of debt 
B)  $2.5 billion of equity and $20 billion of debt 
C)  $3 billion of equity and $19.9 billion of debt 
D)  $2.5 billion of equity and $18.5 billion of debt

Question 7

An all-equity firm had a dividend expense of $30,000 last year. The market value of the firm is $900,000 and the dividend is expected to increase at 6% each year. What is the cost of equity for this firm?

Accepted Answer

A)  9.53% 
B)  10.01% 
C)  10.96% 
D)  11.44% 
A)  9.53% 
B)  10.01% 
C)  10.96% 
D)  11.44%

Question 8

A firm has a capital structure with $50 million in equity and $100 million of debt. The cost of equity capital is 11% and the pretax cost of debt is 5%. If the marginal tax rate of the firm is 40%, compute the weighted average cost of capital of the firm.

Accepted Answer

A)  4.5% 
B)  5.1% 
C)  5.67% 
D)  6.5% 
A)  4.5% 
B)  5.1% 
C)  5.67% 
D)  6.5%

Question 9

The ________ of a firm's debt can be used as the firm's current cost of debt.

Accepted Answer

A)  current yield 
B)  coupon rate 
C)  yield to maturity 
D)  discount yield 
A)  current yield 
B)  coupon rate 
C)  yield to maturity 
D)  discount yield

Question 10

Financial managers must determine their firm's overall cost of capital based on all sources of financing.

Accepted Answer

A) True 
 B)False

Question 11

The outstanding debt of Berstin Corp. has five years to maturity, a current yield of 6%, and a price of $95. What is the pretax cost of debt if the tax rate is 30%.

Accepted Answer

A)  4.2% 
B)  4.8% 
C)  6.9% 
D)  more information needed 
A)  4.2% 
B)  4.8% 
C)  6.9% 
D)  more information needed

Question 12

Assume General Motors has a weighted average cost of capital of 10%. GM is considering investing in a new plant that will save the company $30 million over each of the first two years, and then $15 million each year thereafter. If the investment is $150 million, what is the net present value (NPV) of the project?

Accepted Answer

A)  $18.2 million 
B)  $20.8 million 
C)  $23.4 million 
D)  $26.0 million 
A)  $18.2 million 
B)  $20.8 million 
C)  $23.4 million 
D)  $26.0 million

Question 13

Why do we use leverage if it increases the risk of a firm?

Accepted Answer

Usually, the cost of debt is cheaper tha

Question 14

Internal financing is more costly than external financing because of issuance costs.

Accepted Answer

A) True 
 B)False

Question 15

SIROM Scientific Solutions has $10 million of outstanding equity and $5 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 2. If the market risk premium is 9% and the risk-free rate is 3%, compute the weighted average cost of capital if the firm's tax rate is 30%.

Accepted Answer

A)  15.17% 
B)  15.93% 
C)  16.68% 
D)  17.44% 
A)  15.17% 
B)  15.93% 
C)  16.68% 
D)  17.44%

Question 16

One should use accounting-based book values rather than market values of debt and equity to determine the weights for the different sources of capital.

Accepted Answer

A) True 
 B)False

Question 17

A firm has outstanding debt with a coupon rate of 5%, ten years maturity, and a price of $1,000. What is the after-tax cost of debt if the marginal tax rate of the firm is 35%?

Accepted Answer

A)  2.6% 
B)  2.9% 
C)  3.3% 
D)  3.4% 
A)  2.6% 
B)  2.9% 
C)  3.3% 
D)  3.4%

Question 18

Which of the three costs-debt, preferred stock and common equity-is most difficult to estimate?

Accepted Answer

The cost of common equity is most diffic

Question 19

Assume the total market value of General Motors (GM) is $10 billion. GM has a market value of $6 billion of equity and a face value of $12 billion of debt. What are the weights in equity and debt that are used for calculating the WACC?

Accepted Answer

A)  0.30, 0.70 
B)  0.60, 0.40 
C)  0.40, 0.60 
D)  cannot be determined 
A)  0.30, 0.70 
B)  0.60, 0.40 
C)  0.40, 0.60 
D)  cannot be determined

Question 20

Which of the following is NOT a step in the WACC valuation method?

Accepted Answer

A)  Compute the weighted average cost of capital. 
B)  Discount the incremental free cash flows of the investment using the weighted average cost of capital. 
C)  Determine the incremental free cash flows of the investment. 
D)  Determine the mean weighted average cost of capital for the firm's industry. 
A)  Compute the weighted average cost of capital. 
B)  Discount the incremental free cash flows of the investment using the weighted average cost of capital. 
C)  Determine the incremental free cash flows of the investment. 
D)  Determine the mean weighted average cost of capital for the firm's industry.

Exam 13: The Cost of Capital

What type of adjustment to debt is in practice?

Anheuser Busch, a manufacturer of beverages, is planning to purchase Six Flags theme parks. Anheuser Busch should use the ________ to evaluate the business of Six Flags.

The costs of external financing must be deducted from the net present value (NPV) of a project to evaluate if it is worth undertaking.

The outstanding debt of Berstin Corp. has ten years to maturity, a current yield of 7%, and a price of $95. What is the pretax cost of debt if the tax rate is 30%.

IBM expects to pay a dividend of $2 next year and expects these dividends to grow at 9% a year. The price of IBM is $80 per share. What is IBM's cost of equity capital?

An all-equity firm had a dividend expense of $30,000 last year. The market value of the firm is $900,000 and the dividend is expected to increase at 6% each year. What is the cost of equity for this firm?

A firm has a capital structure with $50 million in equity and $100 million of debt. The cost of equity capital is 11% and the pretax cost of debt is 5%. If the marginal tax rate of the firm is 40%, compute the weighted average cost of capital of the firm.

The ________ of a firm's debt can be used as the firm's current cost of debt.

Financial managers must determine their firm's overall cost of capital based on all sources of financing.

The outstanding debt of Berstin Corp. has five years to maturity, a current yield of 6%, and a price of $95. What is the pretax cost of debt if the tax rate is 30%.

Why do we use leverage if it increases the risk of a firm?

Internal financing is more costly than external financing because of issuance costs.

SIROM Scientific Solutions has $10 million of outstanding equity and $5 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 2. If the market risk premium is 9% and the risk-free rate is 3%, compute the weighted average cost of capital if the firm's tax rate is 30%.

One should use accounting-based book values rather than market values of debt and equity to determine the weights for the different sources of capital.

A firm has outstanding debt with a coupon rate of 5%, ten years maturity, and a price of $1,000. What is the after-tax cost of debt if the marginal tax rate of the firm is 35%?

Which of the three costs-debt, preferred stock and common equity-is most difficult to estimate?

Assume the total market value of General Motors (GM) is $10 billion. GM has a market value of $6 billion of equity and a face value of $12 billion of debt. What are the weights in equity and debt that are used for calculating the WACC?

Which of the following is NOT a step in the WACC valuation method?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters