Question 1

The percentage of debt in the firm's capital structure should be adjusted by multiplying by 1 minus the firm's marginal tax rate.

Accepted Answer

A) True 
 B)False  False

Question 2

Use the following information to answer the following question(s).
A firm currently has the following capital structure which it intends to maintain.Debt: $3,000,000 par value of 9% bonds outstanding with an annual before-tax yield to maturity of 7.67% on a new issue.The bonds currently sell for $115 per $100 par value.Common stock: 46,000 shares outstanding currently selling for $50 per share.The firm expects to pay a $5.50 dividend per share one year from now and is experiencing a 3.67% growth rate in dividends,which it expects to continue indefinitely.The firm's marginal tax rate is 40%.The company has no plans to issue new securities.
-The current total value of the firm is

Accepted Answer

A)  $6,450,000.
B)  $5,750,000.
C)  $4,950,000.
D)  $3,250,000. B

Question 3

PVE,Inc.has $15 million of debt outstanding with a coupon rate of 9%.Currently,the yield to maturity on these bonds is 7%.If the firm's tax rate is 35%,what is the after-tax cost of debt to J & B?

Accepted Answer

A)  10.76%
B)  5.85%
C)  4.55%
D)  5.4% C

Question 4

Which of the following is a correct formula for calculating the cost of capital?

Accepted Answer

A)  WACC = weighted after-tax cost of debt + weighted cost of preferred stock + weighted cost of common stock
B)  WACC = weighted after-tax cost of debt + weighted after-tax cost of preferred stock + weighted after-tax cost of common stock
C)  WACC = (after-tax cost of debt + cost of preferred stock + cost of common stock ) /3
D)  WACC = weighted cost of debt + weighted cost of preferred stock + weighted cost of common stock

Question 5

Use the following information to answer the following question(s).
The current market price of an existing debt issue is $1,125.The bonds have a $1,000 par value,pay interest annually at a 12% coupon rate,and mature in 10 years.The firm has a marginal tax rate of 34%.
-The after-tax cost of this debt issue is

Accepted Answer

A)  7.92%.
B)  6.58%.
C)  12%.
D)  3.39%.

Question 6

Jen and Barry's Ice Cream needs $20 million in new capital to expand its production facilities.It will use 40% debt and 60% equity.The company's after-tax cost of debt is 5% and the cost of equity is 12.5%.Flotation costs will be 3% for debt and 9% for equity.Compute Jen and Barry's weighted average flotation cost.

Accepted Answer

A)  6.6%
B)  6.0%
C)  9.5%
D)  16.1%

Question 7

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

Accepted Answer

A)  the project will be financed entirely with debt.
B)  The firm know that it's marginal tax rate will change from 25% to 34% next year.
C)  the project will be financed entirely from retained earnings.
D)  the price of the company's stock is extremely volatile.

Question 8

A firm has an issue of preferred stock that pays an annual dividend of $2.00 per share and currently is selling for $18.50 per share.Finally,the firm's marginal tax rate is 34%.This firm's cost of financing with new preferred stock is

Accepted Answer

A)  10%.
B)  7.13%.
C)  10.81%.
D)  6.6%.

Question 9

Pilgrim's WACC is 12%.It has one opportunity to invest in a high risk project with an expected rate of return of 25%.It has another opportunity to lease a building to a government agency.The expected rate of return on the lease is 10%.

Accepted Answer

A)  Pilgrim should definitely accept the high risk project and reject the leasing arrangement.
B)  Ideally,Pilgrim would discount the cash flows from each project at a rate appropriate to its risk.
C)  Pilgrim should definitely accept both projects.
D)  Pilgrim should finance the lease with all debt and the high risk project with all equity.

Question 10

The average cost of capital is the appropriate rate to use when evaluating new investments,even though the new investments might be in a higher risk class.

Accepted Answer

A) True 
 B)False

Question 11

The CAPM approach is used to determine the cost of

Accepted Answer

A)  debt.
B)  preferred stock.
C)  common equity.
D)  long term funds.

Question 12

It is not possible for a firm's after-tax cost of common equity to be lower than its after-tax cost of debt.

Accepted Answer

A) True 
 B)False

Question 13

Hill Town Motels has $5 million of debt outstanding with a coupon rate of 12%.Currently,the yield to maturity on these bonds is 14%.If the firm's tax rate is 40%,what is the after-tax cost of debt to Hill Town Motels?

Accepted Answer

A)  5.43%
B)  11.2%
C)  8.4%
D)  5.6%

Question 14

Moore Financing Corporation has preferred stock in its capital structure paying a dividend of $3.75 and selling for $25.00.If the marginal tax rate for Moore is 34%,what is the after-tax cost of preferred financing?

Accepted Answer

The answer of Moore Financing Corporation has preferred stock in...

Question 15

All capital projects incur flotation costs,no matter how they are financed.

Accepted Answer

A) True 
 B)False

Question 16

The total capital that should be used in computing the weights for Spencer's WACC is

Accepted Answer

A)  $1,275.
B)  $2,400.
C)  $2,250.
D)  $1,575.

Question 17

Which of the following statements regarding calculating a firm's cost of capital is correct?

Accepted Answer

A)  The after-tax cost of debt is generally more expensive than the after-tax cost of preferred stock.
B)  Since retained earnings are readily available,the cost of retained earnings is generally lower than the cost of debt.
C)  If a company's beta increases,this will increase the cost of capital.
D)  The level of general economic conditions will determine whether a firm should utilize an arithmetic average cost of capital or a weighted average cost of capital.

Question 18

Flotation costs are usually ignored when computing the NPV of projects financed with newly issued securities.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A)  capital gains taxes on retained earnings.
B)  flotation costs on newly issued common stock.
C)  capital gains taxes on newly issued common stock.
D)  all of the above

Question 20

Jen and Barry's Ice Cream needs $20 million in new capital to expand its production facilities.It will use 40% debt and 60% equity.The company's after-tax cost of debt is 5% and the cost of equity is 12.5%.Flotation costs will be 3% for debt and 9% for equity.What rate should be used to discount the cash flows from the expansion project?

Accepted Answer

A)  6.6%
B)  6.0%
C)  9.5%
D)  16.1%

Exam 14: The Cost of Capital

The percentage of debt in the firm's capital structure should be adjusted by multiplying by 1 minus the firm's marginal tax rate.

PVE,Inc.has $15 million of debt outstanding with a coupon rate of 9%.Currently,the yield to maturity on these bonds is 7%.If the firm's tax rate is 35%,what is the after-tax cost of debt to J & B?

Which of the following is a correct formula for calculating the cost of capital?

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

A firm has an issue of preferred stock that pays an annual dividend of $2.00 per share and currently is selling for $18.50 per share.Finally,the firm's marginal tax rate is 34%.This firm's cost of financing with new preferred stock is

Pilgrim's WACC is 12%.It has one opportunity to invest in a high risk project with an expected rate of return of 25%.It has another opportunity to lease a building to a government agency.The expected rate of return on the lease is 10%.

The average cost of capital is the appropriate rate to use when evaluating new investments,even though the new investments might be in a higher risk class.

The CAPM approach is used to determine the cost of

It is not possible for a firm's after-tax cost of common equity to be lower than its after-tax cost of debt.

Hill Town Motels has $5 million of debt outstanding with a coupon rate of 12%.Currently,the yield to maturity on these bonds is 14%.If the firm's tax rate is 40%,what is the after-tax cost of debt to Hill Town Motels?

Moore Financing Corporation has preferred stock in its capital structure paying a dividend of $3.75 and selling for $25.00.If the marginal tax rate for Moore is 34%,what is the after-tax cost of preferred financing?

All capital projects incur flotation costs,no matter how they are financed.

The total capital that should be used in computing the weights for Spencer's WACC is

Which of the following statements regarding calculating a firm's cost of capital is correct?

Flotation costs are usually ignored when computing the NPV of projects financed with newly issued securities.

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