Question 1

A firm has a return on equity of 12.4 percent according to the dividend growth model and a return of 18.7 percent according to the capital asset pricing model.The market rate of return is 13.5 percent.What rate should the firm use as the cost of equity when computing the firm's weighted average cost of capital (WACC) ?

Accepted Answer

A)  12.4 percent because it is lower than 18.7 percent
B)  18.7 percent because it is higher than 12.4 percent
C)  The arithmetic average of 12.4 percent and 18.7 percent
D)  The arithmetic average of 12.4 percent, 13.5 percent, and 18.7 percent
E)  13.5 percentF) A) and C)
G) All of the above

Question 2

USA Manufacturing issued 30-year, 7.5 percent semiannual bonds 6 years ago.The bonds currently sell at 101 percent of face value.What is the firm's aftertax cost of debt if the tax rate is 35 percent?

Accepted Answer

A)  4.82 percent
B)  5.62 percent
C)  3.76 percent
D)  3.59 percent
E)  4.40 percentF) None of the above
G) A) and E)

Question 3

The cost of capital for a project depends primarily on which one of the following?

Accepted Answer

A)  Source of funds used for the project
B)  Division within the firm that undertakes the project
C)  Project's modified internal rate of return
D)  How the project uses its funds
E)  Project's fixed costsF) B) and D)
G) B) and C)

Question 4

City Equipment announced this morning that its next annual dividend will be decreased to $1.90 a share and that all future dividends will be decreased by an additional 1.9 percent annually.What is the current value per share if the required return is 16.8 percent?

Accepted Answer

A)  $8.80
B)  $10.16
C)  $10.36
D)  $9.88
E)  $10.42F) A) and E)
G) A) and D)

Question 5

The Color Box uses a combination of common stock, preferred stock, and debt financing.The company wants preferred stock to represent 7 percent of the total financing.It also wants to structure the firm in a manner that will produce a weighted average cost of capital of 9.5 percent.The aftertax cost of debt is 4.8 percent, the cost of preferred is 8.9 percent, and the cost of common stock is 14.7 percent.What percentage of the firm's capital funding should be debt financing?

Accepted Answer

A)  48.42 percent
B)  52.03 percent
C)  54.15 percent
D)  44.78 percent
E)  39.21 percentF) B) and E)
G) A) and D)

Question 6

Derek's is a brick-and-mortar toy store.The firm is considering expanding its operations to include Internet sales.Which one of the following would be the best firm to use in a pure play approach to analyzing this proposed expansion?

Accepted Answer

A)  Another brick-and-mortar store that also sells online
B)  A wholesale toy distributor
C)  A toy store that sells online only
D)  The oldest online retailer of any product
E)  Derek's own storeF) A) and B)
G) A) and C)

Exam 12: Cost of Capital

Derek's is a brick-and-mortar toy store.The firm is considering expanding its operations to include Internet sales.Which one of the following would be the best firm to use in a pure play approach to analyzing this proposed expansion?

Correct Answer
verified

The cost of capital for a project depends primarily on which one of the following?

Correct Answer
verified

USA Manufacturing issued 30-year, 7.5 percent semiannual bonds 6 years ago.The bonds currently sell at 101 percent of face value.What is the firm's aftertax cost of debt if the tax rate is 35 percent?

Correct Answer
verified

City Equipment announced this morning that its next annual dividend will be decreased to $1.90 a share and that all future dividends will be decreased by an additional 1.9 percent annually.What is the current value per share if the required return is 16.8 percent?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Exam 12: Cost of Capital

Derek's is a brick-and-mortar toy store.The firm is considering expanding its operations to include Internet sales.Which one of the following would be the best firm to use in a pure play approach to analyzing this proposed expansion?

Correct AnswerverifiedShow Answer

The cost of capital for a project depends primarily on which one of the following?

Correct AnswerverifiedShow Answer

USA Manufacturing issued 30-year, 7.5 percent semiannual bonds 6 years ago.The bonds currently sell at 101 percent of face value.What is the firm's aftertax cost of debt if the tax rate is 35 percent?

Correct AnswerverifiedShow Answer

City Equipment announced this morning that its next annual dividend will be decreased to $1.90 a share and that all future dividends will be decreased by an additional 1.9 percent annually.What is the current value per share if the required return is 16.8 percent?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified