Question 1                                        5 / 5 pt

 The opportunity cost of securities issued by a firm is determined by

 the rate of return investors could earn on riskless securities.

 the rate of return on the firm’s next best investment opportunity.

 the weighted average rate of return on all securities issued by the firm.

***the rate of return investors could obtain on similar securities.

 

Question 2

5 / 5 pts

Sonderson Corporation is undertaking a capital budgeting analysis. The firm’s beta is 1.5. The rate on six-month T-bills is 5%, and the return on the S&P 500 index is 12%. What is the appropriate cost of common equity in determining the firm’s cost of capital?

 

13.1%

17.7%

***15.5%

19.9%

 

Question 3

5 / 5 pts

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 is the total amount of capital that will need to be raised to finance the expansion project?

 

$21,200.000

$22,386,000

***$20,000,000

 

$21,413,276

 

Question 4

5 / 5 pts

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 firm’s weighted average cost of capital is

 

***8.63%.

9.29%. 

7.71%.

 10.47%.

 

Question 5

5 / 5 pts

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

 Segmental Capital Structure approach. (SCS).

 Divisional Average Cost of Capital approach (DACC).

 Project Specific Approach (PSA).

 ***the “pure play” approach.

 

Question 6

5 / 5 pts

As the size of a financing issue increases, the ________ usually decreases on a percentage basis.

 

***flotation cost of the issue

 effective tax rate

 both A and B

 cost of equity

 

Question 7

5 / 5 pts

Bender and Co. is issuing a $1,000 par value bond that pays 9% interest annually. Investors are expected to pay $918 for the 10-year bond. What is the after-tax cost of debt if the firm is in the 34% tax bracket?

 

15.68%

 9.00%

 ***6.83% 

10.35%

 

Question 8

5 / 5 pts

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

 

12%.

 3.39%.

 ***6.58%.

 7.92%.

 

Question 9

5 / 5 pts

A strong stock market and reasonably good earnings have caused the price of the firm’s common stock to increase by 25%.

 

***This will only affect the cost of capital if the firm uses CAPM to compute the cost of equity.

 All thing’s equal, this will lower the firm’s cost of capital.

 All thing’s equal, this will increase the firm’s cost of capital.

 This will have no effect on the firm’s cost of capital.

 

Question 10

5 / 5 pts

Because issuing common equity entails less risk to the firm, it is always less expensive than borrowing.

 

***True

 False

 

Question 11

5 / 5 pts

When new capital must be raised for an expansion project, flotation costs should

 

be considered in recomputing the firm’s overall WACC.

 be ignored.

 ***be deducted from the operating cash flows.

 increase the initial investment outlay.

 

Question 12

5 / 5 pts

The last paid dividend is $2 for a share of common stock that is currently selling for $20. What is the cost of common equity if the long-term growth rate in dividends for the firm is expected to be 8%?

 

14.8%

12.8%

16.8%

10.8%

***18.8%

 

Question 13

5 / 5 pts

Berlioz Inc. is trying to estimate its cost of common equity, and it has the following information. The firm has a beta of 0.90, the before-tax cost of the firm’s debt is 7.75%, and the firm estimates that the risk-free rate is 4% while the current market return is 12%. Berlioz stock currently sells for $35.00 per share. The firm pays dividends annually and expects dividends to grow at a constant rate of 5% indefinitely. The most recent dividend per share, paid yesterday, is $2.00. Finally, the firm has a marginal tax rate of 34%. The best estimate of the cost of new common equity is

 

11.50%.

11.00%.

***between 11.0% and 11.2%.

between 10% and 12%.

 

Question 14

5 / 5 pts

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

 

True

***False

 

Question 15

5 / 5 pts

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.

 

True

***False

 

Question 16

5 / 5 pts

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

 

$4,950,000.

$6,450,000.

$3,250,000.

***$5,750,000.

 

Question 17

5 / 5 pts

Alpha’s beta is 1.06, the present T-bond rate is 6%, and the return on the S & P 500 is 15.25%. What is Alpha’s cost of common equity using the CAPM approach?

 

21.25%

***15.81%

 

9.25%

6.32%

 

Question 18

5 / 5 pts

The most expensive source of capital is usually

 

debt.

preferred stock.

retained earnings.

***new common stock.

 

Question 19

5 / 5 pts

Cost of capital is

 

the coupon rate of debt.

***the rate of return that must be earned on additional investment if firm value is to remain unchanged.

the average cost of the firm’s assets.

a minimum rate of return set by the board of directors.

 

Question 20

5 / 5 pts

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

 

***current market values for bonds, common stock, and preferred stock and book values for retained earnings.

current market values.

book values in accord with generally accepted accounting principles.

subjective adjustments for firm risk.