Question 1

The company cost of capital for a firm with a 65/35 debt/equity split,8% cost of debt,15% cost of equity,and a 35% tax rate would be:

Accepted Answer

A)   7.02%.
B)   9.12%.
C)   10.45%.
D)   13.80%. C

Question 2

If a firm has twice as much equity as debt in its capital structure,then the firm has:

Accepted Answer

A)   75.0% debt.
B)   66.7% equity.
C)   40.0% debt.
D)   33.3% equity. B

Question 3

What proportion of a firm is equity financed if the WACC is 14%,the after-tax cost of debt is 7.0%,the tax rate is 35%,and the required return on equity is 18%?

Accepted Answer

A)   54.00%
B)   63.64%
C)   70.26%
D)   77.78% B

Question 4

For purposes of computing the WACC,if the book value of equity exceeds the market value of equity,then:

Accepted Answer

A)   the book value of equity should be used.
B)   the book value of equity less retained earnings should be used.
C)   the market value of equity should be used.
D)   the market value of equity less retained earnings should be used.

Question 5

Which of the following changes offer the greatest chance of changing a project's NPV from negative to positive?

Accepted Answer

A)   Substituting preferred stock for debt
B)   Selling the debt at less than par value
C)   Reducing project risk
D)   Decreasing the marginal tax rate

Question 6

What dividend is paid on preferred stock if investors require a 9% rate of return and the stock has a market value of $54.00 per share and a book value of $50.00 per share?

Accepted Answer

A)   $2.92
B)   $4.50
C)   $4.68
D)   $4.86

Question 7

Changing the capital structure by adding debt will not:

Accepted Answer

A)   increase the return that shareholders require.
B)   increase default risk.
C)   decrease debtholder risk.
D)   increase the cost of debt.

Question 8

What would you estimate to be the required rate of return for equity investors if a stock sells for $40.00 and will pay a $4.40 dividend that is expected to grow at a constant rate of 5%?

Accepted Answer

A)   7.6%
B)   12.0%
C)   12.6%
D)   16.0%

Question 9

As debt is added to the capital structure,the:

Accepted Answer

A)   WACC will continually decline.
B)   WACC will continually increase.
C)   cost of debt can be expected to rise.
D)   WACC will be unaffected.

Question 10

A company's CFO wants to maintain a target debt-to-equity ratio of 1/4.If the WACC is 18.6%,and the pretax cost of debt is 9.4%,what is the cost of common equity assuming a tax rate of 34%?

Accepted Answer

A)   19.90%
B)   20.90%
C)   21.70%
D)   22.73%

Question 11

XYZ Company issues common stock that is expected to pay a dividend over the next year of $4 at a price of $25 per share.If its expected growth rate is 5%,what is XYZ's cost of common equity?

Accepted Answer

A)   9.0%
B)   11.0%
C)   16.0%
D)   21.0%

Question 12

The mix of a company's short-term financing is referred to as its capital structure.

Accepted Answer

A) True 
 B)False

Question 13

How much is added to a firm's weighted-average cost of capital for 45% debt financing with a required rate of return of 10% and a tax rate of 35%?

Accepted Answer

A)   1.29%
B)   2.93%
C)   3.50%
D)   4.50%

Question 14

Capital structure in essence is a firm's mix of long-term financing.

Accepted Answer

A) True 
 B)False

Question 15

What is the WACC for a firm with 40% debt,20% preferred stock,and 40% equity if the respective costs for these components are 6% after tax,12% after tax,and 18% before tax? The firm's tax rate is 35%.

Accepted Answer

A)   9.48%
B)   11.16%
C)   12.00%
D)   15.60%

Question 16

Weighted-average cost of capital is the expected rate of return on a portfolio of all the firm's securities,adjusted for tax savings due to interest payments.

Accepted Answer

A) True 
 B)False

Question 17

What is the WACC for a firm with 40% debt,20% preferred stock,and 40% equity if the respective costs for these components are 9.23% before tax,12% after tax,and 18% before tax? The firm's tax rate is 35%.

Accepted Answer

A)   9.48%
B)   11.16%
C)   12.00%
D)   15.60%

Question 18

What proportion of a firm is equity financed if the WACC is 14%,the before-tax cost of debt is 10.77%,the tax rate is 35%,and the required return on equity is 18%?

Accepted Answer

A)   54.00%
B)   63.64%
C)   70.26%
D)   77.78%

Question 19

Why can it be incorrect to evaluate all capital budgeting proposals at the firm's current weighted-average cost of capital?

Accepted Answer

The answer of Why can it be incorrect to evaluate...

Question 20

Which of the following changes would tend to increase the company cost of capital for a traditional firm?

Accepted Answer

A)   Decrease the proportion of equity financing.
B)   Increase the market value of the debt.
C)   Decrease the proportion of debt financing.
D)   Decrease the market value of the equity.

Exam 13: The Weighted-Average Cost of Capital and Company Valuation

The company cost of capital for a firm with a 65/35 debt/equity split,8% cost of debt,15% cost of equity,and a 35% tax rate would be:

If a firm has twice as much equity as debt in its capital structure,then the firm has:

What proportion of a firm is equity financed if the WACC is 14%,the after-tax cost of debt is 7.0%,the tax rate is 35%,and the required return on equity is 18%?

For purposes of computing the WACC,if the book value of equity exceeds the market value of equity,then:

Which of the following changes offer the greatest chance of changing a project's NPV from negative to positive?

What dividend is paid on preferred stock if investors require a 9% rate of return and the stock has a market value of $54.00 per share and a book value of $50.00 per share?

Changing the capital structure by adding debt will not:

What would you estimate to be the required rate of return for equity investors if a stock sells for $40.00 and will pay a $4.40 dividend that is expected to grow at a constant rate of 5%?

As debt is added to the capital structure,the:

A company's CFO wants to maintain a target debt-to-equity ratio of 1/4.If the WACC is 18.6%,and the pretax cost of debt is 9.4%,what is the cost of common equity assuming a tax rate of 34%?

XYZ Company issues common stock that is expected to pay a dividend over the next year of $4 at a price of $25 per share.If its expected growth rate is 5%,what is XYZ's cost of common equity?

The mix of a company's short-term financing is referred to as its capital structure.

How much is added to a firm's weighted-average cost of capital for 45% debt financing with a required rate of return of 10% and a tax rate of 35%?

Capital structure in essence is a firm's mix of long-term financing.

What is the WACC for a firm with 40% debt,20% preferred stock,and 40% equity if the respective costs for these components are 6% after tax,12% after tax,and 18% before tax? The firm's tax rate is 35%.

Weighted-average cost of capital is the expected rate of return on a portfolio of all the firm's securities,adjusted for tax savings due to interest payments.

What is the WACC for a firm with 40% debt,20% preferred stock,and 40% equity if the respective costs for these components are 9.23% before tax,12% after tax,and 18% before tax? The firm's tax rate is 35%.

What proportion of a firm is equity financed if the WACC is 14%,the before-tax cost of debt is 10.77%,the tax rate is 35%,and the required return on equity is 18%?

Why can it be incorrect to evaluate all capital budgeting proposals at the firm's current weighted-average cost of capital?

Which of the following changes would tend to increase the company cost of capital for a traditional firm?