Question 1

The book value of a firm's equity is $100 million and its market value of equity is $200 million. The face value of its debt is $50 million and its market value of debt is $60 million. What is the market value of assets of the firm?

Accepted Answer

A)  $150 million 
B)  $160 million 
C)  $260 million 
D)  $250 million

Question 2

Which of the following statements is FALSE?

Accepted Answer

A)  Issuance costs increase the WACC. 
B)  External equity is less expensive than retained earnings. 
C)  A project that can be financed with internal funds will be less costly than the same project if it were financed with external funds. 
D)  Issuance costs should be treated as cash outflows in NPV analysis.

Question 3

A firm incurs $40,000 in interest expenses each year. If the tax rate of the firm is 30%, what is the effective after-tax interest rate expense for the firm?

Accepted Answer

A)  $21,000.00 
B)  $22,400.00 
C)  $23,800.00 
D)  $28,000.00

Question 4

The fact that the interest paid on debt is a tax-deductible expense increases the cost of debt financing.

Accepted Answer

A) True 
 B)False

Question 5

Assume Ford Motors expects a new hybrid-engine project to produce incremental cash flows of $50 million each year, and expects these to grow at 4% each year. The upfront project costs are $420 million and Ford's weighted average cost of capital is 9%. If the issuance costs for external finances are $20 million, what is the net present value (NPV) of the project?

Accepted Answer

A)  $504 million 
B)  $560 million 
C)  $588 million 
D)  $616 million

Question 6

What is the difference between the effective cost of debt and the cost of debt?

Accepted Answer

The answer of What is the difference between the effective...

Question 7

An all-equity firm had a dividend expense of $20,000 last year. The market value of the firm is $600,000 and the dividend is expected to increase at 5% each year. What is the cost of equity for this firm?

Accepted Answer

A)  6.80% 
B)  7.65% 
C)  8.50% 
D)  9.35%

Question 8

For an unlevered firm, the cost of capital can be determined by using the ________.

Accepted Answer

A)  yield on the traded debt 
B)  Capital Asset Pricing Model 
C)  dividend yield 
D)  preferred stock yield

Question 9

Your estimate of the market risk premium is 6%. The risk-free rate of return is 4% and General Motors has a beta of 1.4. What is General Motors' cost of equity capital?

Accepted Answer

A)  11.2% 
B)  12.4% 
C)  11.8% 
D)  13.0%

Question 10

Assume General Motors has a weighted average cost of capital of 9%. GM is considering investing in a new plant that will save the company $20 million over each of the first two years, and then $10 million each year thereafter. If the investment is $100 million, what is the net present value (NPV) of the project?

Accepted Answer

A)  $25.8 million 
B)  $31.6 million 
C)  $28.7 million 
D)  $27.3 million

Exam 13: The Cost of Capital