Exam 14: The Cost of Capital

Book values are sometimes used to compute the percentage of debt in an firm's capital structure because much corporate debt is infrequently traded and market prices cannot be obtained.

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.

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

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

When calculating the weighted average cost of capital, which of the following has to be adjusted for taxes?

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.

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

The CAPM approach is used to determine the cost of

The proportion of debt in this firm's capital structure is

Which of the following best describes a firm's cost of capital?

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.

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

Difficulties in estimating a divisional cost of capital include

Given the following information, determine the risk-free rate. Cost of equity = 12% Beta = 1.50 Market risk premium = 6%

Which of the following circumstances would invalidate the constant cost of capital assumption?

The after-tax cost of capital is computed by multiplying the before-tax cost of capital by 1 minus the tax rate.

No adjustment is made in the cost of preferred stock for taxes since preferred stock dividends are not tax-deductible.

Estimating a divisional cost of capital by comparing the division to a similar free-standing company is known as

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

The cost of newly issued common stock is greater than the current cost common equity because of