Question 1

Assume that XYZ Corporation is a levered company with the following information: Kl = cost of levered equity capital for XYZ = 13 percent
I = before-tax borrowing cost = 8 percent
T = marginal corporate income tax rate = 30 percent
If XYZ's debt-to-total-market-value ratio is 40 percent,then its weighted average cost of capital,K,is

Accepted Answer

A) 8 percent. 
B) 9 percent. 
C) 10 percent. 
D) 12 percent.

Question 2

In the graph,

Accepted Answer

A) Kl and Kg represent,respectively,the cost of capital under international and local capital structures; IRR represents the internal rate of return on investment projects; Il and Ig represent,respectively,the optimal investment outlays under the alternative capital structures. 
B) Kl and Kg represent,respectively,the cost of capital under local and international capital structures; IRR represents the internal rate of return on investment projects; Il and Ig represent the optimal investment outlays under the alternative capital structures. 
C) both of the options 
D) none of the options

Question 3

Solve for the weighted average cost of capital. $\begin{array}{lcl}
10.60 \%&=&K_{1}&=&\text { cost of equity capital for a leveraged firm }\
1 / 3&=&\lambda&=&\text { debt-to-total-market-value ratio }\
8.0 \%&=&i&=&\text { before-tax borrowing cost }\
40.0 \%&=&\tau&=&\text { marginal corporate income tax rate }
\end{array}$

Accepted Answer

A) 8.67 percent 
B) 8.00 percent 
C) 7.60 percent 
D) 7.33 percent

Question 4

Solve for the weighted average cost of capital. $\begin{aligned}
12.40 \% &=K_{1} \
2 / 3 &=\lambda \
8.0 \% &=i \
40.0 \% 0 &=\tau
\end{aligned}$

Accepted Answer

A) 8.67 percent 
B) 8.00 percent 
C) 7.60 percent 
D) 7.33 percent

Question 5

When the choice of financing a foreign subsidiary is between external debt and equity financing

Accepted Answer

A) many host governments tolerate the repatriation of funds in the form of interest much better than dividends. 
B) debt financing is generally secured from the World Bank,but only in developed countries. 
C) many host governments tolerate the repatriation of funds in the form of dividends much better than interest. 
D) none of the options

Question 6

Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 2,a tax rate of 40 percent,a levered cost of equity of 12 percent and a pre-tax cost of debt of 9 percent.

Accepted Answer

A) 7.6 percent 
B) 7.968 percent 
C) 10 percent 
D) none of the options

Question 7

Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of 3/4

Accepted Answer

A) 1 
B) 2 
C) 3 
D) 4

Question 8

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 1½.

Accepted Answer

A) 1/3 
B) 1/2 
C) 3/5 
D) 2/3

Question 9

At the optimal capital structure,

Accepted Answer

A) K = (1 − λ)Kl + λ(1 − τ)i will be minimized. 
B) The debt-equity ratio will be equal to the debt-to-value ratio. 
C) K = (1 − λ)Kl + λ(1 − τ)i will be maximized. 
D) none of the options

Question 10

When the parent company is fully responsible for the subsidiary's obligations,

Accepted Answer

A) the independent financial structure of the subsidiary is irrelevant. 
B) potential creditors will examine the parent's overall financial condition,not the subsidiary's. 
C) the independent financial subsidiary can have the same capital structure as the parent. 
D) all of the options

Question 11

A value-maximizing firm would

Accepted Answer

A) undertake an investment project as long as the IRR exceeds the NPV. 
B) undertake an investment project as long as the IRR is less than the cost of capital. 
C) undertake an investment project as long as the IRR exceeds the cost of capital. 
D) none of the options

Question 12

The cost of equity capital is

Accepted Answer

A) the expected return on the firm's stock that investors require. 
B) frequently estimated by using the Capital Asset Pricing Model (CAPM). 
C) generally considered to be a linear function of the systematic risk inherent in the security. 
D) all of the options

Question 13

The required return on equity for an all-equity firm is 10.0 percent.They currently have a beta of one and the risk-free rate is 5 percent and the market risk premium is 5 percent.They are considering a change in capital structure to a debt-to-equity ratio of 1/2,the tax rate is 40 percent,the pre-tax cost of debt is 8 percent.Find the beta if this firm changes capital structure.

Accepted Answer

A) 1.12 percent 
B) 1 percent 
C) 7.4 percent 
D) none of the options

Question 14

Solve for the weighted average cost of capital. $\begin{aligned}
15.40 \% &=K_{1} \
9 / 11 &=\lambda \
8.0 \% &=i \
40.0 \% 0 &=\tau
\end{aligned}$

Accepted Answer

A) 7.00 percent 
B) 6.89 percent 
C) 6.73 percent 
D) 6.67 percent

Question 15

Micro Spinoffs,Inc.,issued 20-year debt one year ago today at par value with a coupon rate of 9 percent,paid annually.Today,the debt is selling at $1,050.If the firm's tax rate is 34 percent,what is its after-tax cost of debt?

Accepted Answer

A) 9 percent 
B) 8.46 percent 
C) 5.94 percent 
D) 5.58 percent

Question 16

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 3.

Accepted Answer

A) 3/4 
B) 7/9 
C) 4/5 
D) 9/11

Question 17

Suppose that the British stock market is segmented from the rest of the world.Using the CAPM and a risk-free rate of 5 percent,estimate the equity cost of capital for Stansfield. Correlation Coefficients
Stansfield England World SD(%) $\mathcal { R }$ %
$$\begin{array} { l c c l c c } 
\text { Stansfield } & 1.00 & 0.90 & 0.60 & 20 & ? \
\text { England } & & 1.00 & 0.80 & 18 & 14 \
\text { World } & & & 1.00 & 15 & 12
\end{array}$$

Accepted Answer

A) 14 percent 
B) 12 percent 
C) 9 percent 
D) none of the options

Question 18

Solve for the weighted average cost of capital. $\begin{aligned}
16.00 \% &=K_{1} \
5 / 6 &=\lambda \
8.0 \% &=i \
40.0 \% 0 &=\tau
\end{aligned}$

Accepted Answer

A) 7.00 percent 
B) 6.89 percent 
C) 6.73 percent 
D) 6.67 percent

Question 19

The following is an outline of certain potential benefits as well as costs associated with the cross-border listings of stocks: (i)the company can expand its potential investor base
(ii)issues involving the disclosure and listing requirements
(iii)creates a secondary market for the company's shares
(iv)volatility spillover from the overseas markets
(v)liquidity
(vi)control of the company by foreigners
(vii)enhances the visibility of the company's name and its products in foreign marketplaces
Which of the following represent all the potential benefits of the cross-border listings of stocks?

Accepted Answer

A) (i),(ii),and (iii) 
B) (ii),(iv),and (vi) 
C) (i),(iii),(v),and (vii) 
D) (iv),(v),(vi),and (vii)

Question 20

Solve for the weighted average cost of capital. $\begin{aligned}
13.00 \% &=K_{1} \
5 / 7 &=\lambda \
8.0 \% &=i \
40.0 \% 0 &=\tau
\end{aligned}$

Accepted Answer

A) 8.67 percent 
B) 8.00 percent 
C) 7.60 percent 
D) 7.14 percent

Exam 17: International Capital Structure and the Cost of Capital

In the graph,

Solve for the weighted average cost of capital. $\begin{aligned}12.40 \% &=K_{1} \\2 / 3 &=\lambda \\8.0 \% &=i \\40.0 \% 0 &=\tau\end{aligned}$

When the choice of financing a foreign subsidiary is between external debt and equity financing

Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 2,a tax rate of 40 percent,a levered cost of equity of 12 percent and a pre-tax cost of debt of 9 percent.

Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of 3/4

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 1½.

At the optimal capital structure,

When the parent company is fully responsible for the subsidiary's obligations,

A value-maximizing firm would

The cost of equity capital is

Solve for the weighted average cost of capital. $\begin{aligned}15.40 \% &=K_{1} \\9 / 11 &=\lambda \\8.0 \% &=i \\40.0 \% 0 &=\tau\end{aligned}$

Micro Spinoffs,Inc.,issued 20-year debt one year ago today at par value with a coupon rate of 9 percent,paid annually.Today,the debt is selling at $1,050.If the firm's tax rate is 34 percent,what is its after-tax cost of debt?

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 3.

Solve for the weighted average cost of capital. $\begin{aligned}16.00 \% &=K_{1} \\5 / 6 &=\lambda \\8.0 \% &=i \\40.0 \% 0 &=\tau\end{aligned}$

Solve for the weighted average cost of capital. $\begin{aligned}13.00 \% &=K_{1} \\5 / 7 &=\lambda \\8.0 \% &=i \\40.0 \% 0 &=\tau\end{aligned}$

Exam 17: International Capital Structure and the Cost of Capital

In the graph,

Solve for the weighted average cost of capital. 12.40%=K12/3=λ8.0%=i40.0%0=τ\begin{aligned}12.40 \% &=K_{1} \\2 / 3 &=\lambda \\8.0 \% &=i \\40.0 \% 0 &=\tau\end{aligned}12.40%2/38.0%40.0%0​=K1​=λ=i=τ​

When the choice of financing a foreign subsidiary is between external debt and equity financing

Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 2,a tax rate of 40 percent,a levered cost of equity of 12 percent and a pre-tax cost of debt of 9 percent.

Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of 3/4

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 1½.

At the optimal capital structure,

When the parent company is fully responsible for the subsidiary's obligations,

A value-maximizing firm would

The cost of equity capital is

Solve for the weighted average cost of capital. 15.40%=K19/11=λ8.0%=i40.0%0=τ\begin{aligned}15.40 \% &=K_{1} \\9 / 11 &=\lambda \\8.0 \% &=i \\40.0 \% 0 &=\tau\end{aligned}15.40%9/118.0%40.0%0​=K1​=λ=i=τ​

Micro Spinoffs,Inc.,issued 20-year debt one year ago today at par value with a coupon rate of 9 percent,paid annually.Today,the debt is selling at $1,050.If the firm's tax rate is 34 percent,what is its after-tax cost of debt?

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 3.

Solve for the weighted average cost of capital. 16.00%=K15/6=λ8.0%=i40.0%0=τ\begin{aligned}16.00 \% &=K_{1} \\5 / 6 &=\lambda \\8.0 \% &=i \\40.0 \% 0 &=\tau\end{aligned}16.00%5/68.0%40.0%0​=K1​=λ=i=τ​

Solve for the weighted average cost of capital. 13.00%=K15/7=λ8.0%=i40.0%0=τ\begin{aligned}13.00 \% &=K_{1} \\5 / 7 &=\lambda \\8.0 \% &=i \\40.0 \% 0 &=\tau\end{aligned}13.00%5/78.0%40.0%0​=K1​=λ=i=τ​

Solve for the weighted average cost of capital. $\begin{aligned}12.40 \% &=K_{1} \\2 / 3 &=\lambda \\8.0 \% &=i \\40.0 \% 0 &=\tau\end{aligned}$

Solve for the weighted average cost of capital. $\begin{aligned}15.40 \% &=K_{1} \\9 / 11 &=\lambda \\8.0 \% &=i \\40.0 \% 0 &=\tau\end{aligned}$

Solve for the weighted average cost of capital. $\begin{aligned}16.00 \% &=K_{1} \\5 / 6 &=\lambda \\8.0 \% &=i \\40.0 \% 0 &=\tau\end{aligned}$

Solve for the weighted average cost of capital. $\begin{aligned}13.00 \% &=K_{1} \\5 / 7 &=\lambda \\8.0 \% &=i \\40.0 \% 0 &=\tau\end{aligned}$