TB_Moyer11e_ch12
28 Pages

TB_Moyer11e_ch12

Course Number: FIN 504, Spring 2012

College/University: TAMU Commerce

Word Count: 9464

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Chapter 12THE COST OF CAPITAL MULTIPLE CHOICE 1. The Institutional Brokers' Estimate Service (IBES) summarizes analysts' _______. a. short-term earnings forecasts b. long-term earnings growth rates c. bankruptcy forecasts d. short-term earnings forecasts and long-term earnings growth rates ANS: D PTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital NAT: Reflective thinking TOP: Issues in...

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12THE Chapter COST OF CAPITAL MULTIPLE CHOICE 1. The Institutional Brokers' Estimate Service (IBES) summarizes analysts' _______. a. short-term earnings forecasts b. long-term earnings growth rates c. bankruptcy forecasts d. short-term earnings forecasts and long-term earnings growth rates Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital NAT: Reflective thinking TOP: Issues in implementation 2. Studies analyzing the historical returns earned by common stock investors have found that the returns from average risk common stock investments over the years have averaged (arithmetically) _______ percentage points _______ than the returns on Treasury bills. a. 6 to 8, higher b. 1 to 2, lower c. 3 to 4, higher d. 8 to 9, higher Register to View AnswerPTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital; Understand risk and return TOP: Capital asset pricing model approach 3. The cost of equity capital for non-dividend paying stocks can be determined by a. using the Capital Asset Pricing Model b. estimating ke for comparable dividend-paying stocks in their industry c. forecasting the liquidation proceeds from the sale of the company's assets. d. using the CAPM and by estimating ke for comparable dividend-paying stocks in their industry Register to View AnswerPTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital; Understand risk and return TOP: Risk premium on debt & other approaches for estimating... 4. For a company that is not planning to change its target capital structure, the proportions of debt and equity used in calculating the weighted cost of capital should be based on the current _______ weights of the individual components. a. book value b. market value c. replacement value d. accounting value Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital TOP: Determining the weighted cost of capital schedule NAT: Reflective thinking 5. The cost of capital is a. the rate of return required by investors in the firm's securities b. the minimum rate of return required on new investments of high risk undertaken by the firm c. approximately 10 percent for most firms d. concerned with plant and equipment only Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital NAT: Reflective thinking TOP: Introduction 6. A firm can raise up to $700 million for investment from a mixture of debt, preferred stock and retained equity. Above $700 million, the firm must issue new common stock. Assuming that debt costs and preferred stock costs remain unchanged, the marginal cost of capital for amounts up to $700 million will be _______ the marginal cost of capital for amounts over $700 million. a. less than b. equal to c. greater than d. cannot be determined from the information given Register to View AnswerPTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital TOP: Determining the weighted marginal cost of capital schedule 7. The CAPM assumes that the only risk of concern to the investor is _______, which is measured by _______. a. Unsystematic risk, beta b. Systematic risk, the return to the market portfolio c. Systematic risk, beta d. Unsystematic risk, the return to the market portfolio Register to View AnswerPTS: 1 LOC: Understand risk and return OBJ: TYPE: Fact NAT: Reflective thinking TOP: Capital asset pricing model approach | p. 462 8. If a firm adopts a large proportion of above-average-risk investment projects that are not offset by below-average-risk investment projects a. its cost of capital will rise b. the average risk premium for the firm will decline c. the risk-free rate will increase as more risk is added d. its cost of capital will fall Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital NAT: Reflective thinking TOP: Divisional costs of capital 9. The most appropriate weights to use in calculating a firm's cost of capital are the proportions of the components in the firm's _______ capital structure. a. historical average b. long-range target c. current d. industry average Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital TOP: The problem of lumpy capital NAT: Reflective thinking 10. For firms subject to the 34% marginal tax rate, the after-tax cost of _______ is roughly two-thirds the cost of preferred stock. a. retained earnings b. new common stock c. long-term debt d. retained earnings and new common stock Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital NAT: Reflective thinking TOP: Cost of debt 11. There are four major components that determine the risk premium. They include all the following except a. interest rate risk b. business risk c. reinvestment rate risk d. financial risk Register to View AnswerPTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital; Understand risk and return TOP: Nature of risk premiums 12. The required rate of return on any security consists of a a. risk premium plus an expected inflation rate b. risk free rate plus a risk premium c. inflation rate plus a marketability premium d. risk free rate plus an inflation premium Register to View AnswerPTS: 1 LOC: Understand risk and return OBJ: TYPE: Fact NAT: Reflective thinking TOP: Nature of risk premiums 13. All of the following are true EXCEPT: a. The claims of preferred stockholders on the firm's earnings are junior to those of debtholders. b. The risk of recapitalization increases a firm's required rate of return. c. Long-term state government securities are always less risky than corporate long-term securities of the same maturity. d. The cost of capital to the firm is equal to the equilibrium rate of return demanded by investors in the capital markets for securities with that degree of risk Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital NAT: Reflective thinking TOP: Relative costs of capital 14. Break points can be determined by dividing the amount of funds available from each financing source at a fixed cost by the _____ proportion for that financing source. a. weighted capital structure b. target capital structure c. economic capital structure d. divisional capital structure Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital TOP: Determining the weighted cost of capital structure NAT: Reflective thinking 15. If a preferred stock is callable, then the calculation of the cost of preferred stock financing is a. similar to that for bonds b. equal to Dp/Pn c. equal to Dp less flotation costs d. less than Dp/Pn Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital NAT: Reflective thinking TOP: Cost of preferred stock 16. The constant growth valuation model approach to calculating the cost of equity assumes that a. earnings and dividends grow at a constant rate, but stock price growth is indeterminate b. the growth rate is greater than or equal to ke c. dividends are constant d. earnings, dividends, and stock price will grow at a constant rate Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital TOP: Dividend valuation model approach NAT: Reflective thinking 17. The total return to stockholders, ke, is composed of the a. opportunity cost plus a risk premium b. dividend yield plus the price appreciation of the security c. opportunity cost plus an inflation premium d. dividend yield minus the risk premium Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital TOP: Dividend valuation model approach NAT: Reflective thinking 18. If a firm is losing money then the after-tax cost of debt is a. equal to kd (1 - T) b. found by trial and error c. equal to the pretax cost of debt d. equal to the yield to first call date Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital NAT: Reflective thinking TOP: Cost of debt 19. The historic beta of a firm is of little use as a forecast of the firm's future systematic risk characteristics when a. the firm is growing at a rate of 7-10 percent a year b. the firm is expanding an existing product line c. the firm is expanding into a new product line d. all of these answers are correct Register to View AnswerPTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital; Understand risk and return TOP: The capital asset pricing model approach 20. All of the following methods may be used to determine the cost of equity capital (k e) for a nondividend-paying stock except a. the risk premium on debt approach b. the Capital Asset Pricing Model approach c. comparing with similar dividend-paying stocks in the industry d. the simulation with growth expectations approach Register to View AnswerPTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital; Understand risk and return TOP: Risk premium on debt & other approaches for estimating... 21. The cost of external equity is greater than the cost of internal equity because a. it decreases the earnings per share b. it increases the market price of the stock c. of the flotation costs d. dividends are increased Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of external equity capital NAT: Reflective thinking 22. Retained earnings are a cheaper source of funds than the sale of new equity because a. retention defers the payment of taxable dividends to shareholders b. there are no flotation costs c. new shares are usually priced below current market price d. all the above Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of external equity capital NAT: Reflective thinking 23. Historic average capital costs are _______ new (marginal) resource allocation decisions. a. not relevant for making b. very useful when making c. necessary for making d. the relevant costs for making Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital NAT: Reflective thinking TOP: Marginal costs 24. Which of the following is not a typical source of debt funds for a small firm? a. investment banking firms b. commercial finance companies c. Small Business Administration d. leasing companies Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital TOP: Entrepreneurial finance issues: The cost of capital NAT: Reflective thinking 25. If a firm will use only equity funds during the current capital budgeting period then the _______ is the correct capital cost to use for computing the cost of funds for the firm. a. cost of equity capital b. weighted cost of funds c. historical cost of funds d. all of these answers are correct Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital TOP: The problem of lumpy capital NAT: Reflective thinking 26. The optimal capital budget is determined by comparing the expected project returns to the company's a. computed break points b. cost of equity schedule c. marginal cost of capital schedule d. optimal opportunity curve Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital TOP: Determining the optimal capital budget NAT: Reflective thinking 27. The cost of depreciation-generated funds is equal to a. the cost of equity capital b. zero, because depreciation is a non-cash expense c. the investment opportunity cost d. the weighted cost of capital Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital TOP: The cost of depreciation-generated funds NAT: Reflective thinking 28. __________ refers to the variability in the firm's operating earnings. a. Business risk b. Financial risk c. Marketability risk d. Interest rate risk Register to View AnswerPTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital; Understand risk and return TOP: Nature of risk premiums 29. The major components that determine the risk premium on a specific security at any point in time include all of the following except a. business risk b. financial risk c. interest rate risk d. real rate of return risk Register to View AnswerPTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital; Understand risk and return TOP: Nature of risk premiums 30. Rank in ascending order (lowest to highest) the relative riskiness of the various types of corporate and government securities. a. common stock, preferred stock, corporate debt, long-term government debt b. corporate debt, long-term government debt, preferred stock, common stock c. long-term government debt, corporate debt, preferred stock, common stock d. corporate debt, preferred stock, long-term government debt, common stock Register to View AnswerPTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital; Understand risk and return TOP: Relative costs of capital 31. Rank in ascending order (lowest to highest) investors' required rates of return on the various types of corporate securities. a. preferred stock, corporate debt, common stock b. common stock, preferred stock, corporate debt c. preferred stock, common stock, corporate debt d. corporate debt, preferred stock, common stock Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital NAT: Reflective thinking TOP: Relative costs of capital 32. Which of the following statements (if any) is (are) true concerning companies that do not pay dividends? a. The cost of equity capital can be estimated using the Capital Asset Pricing Model. b. The cost of equity capital is equal to the growth short-term rate of earnings per share. c. The dividend capitalization model can be used to determine an accurate cost of equity capital. d. The cost of equity capital cannot be determined by using the CAPM, the risk premium on debt approach, or by estimating ke for comparable dividend-paying stocks in their industry. Register to View AnswerPTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital; Understand risk and return TOP: Risk premium on debt & other approaches for estimating... 33. The optimal capital budget is indicated by the point at which the __________ and the __________ intersect. a. depreciation schedule; investment opportunity schedule b. investment opportunity curve; marginal cost of capital curve c. investment opportunity curve; average cost of capital curve d. efficient portfolio curve; marginal cost of capital curve Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital TOP: Determining the optimal capital budget NAT: Reflective thinking 34. During the 1980s, the cost of capital for U.S. firms averaged about 3.3 percentage points higher than Japanese firms. During 1990 this disadvantage may have disappeared due to: a. higher exports to the U.S. b. higher real interest rates in Japan c. larger shareholder interest d. higher Japanese stock market Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of financial markets and interest rates NAT: Multicultural understanding TOP: International issues 35. If a firm sells assets, generating cash flows, the cost of these funds is ______. a. the firm's cost of equity b. the firm's cost of cash flows c. the firm's weighted cost of capital d. zero Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of depreciation generated funds NAT: Reflective thinking 36. Small firms are reluctant to obtain capital through the sale of common stock because of: a. potential loss of voting control b. high issuance costs c. high cost of debt d. both the potential loss of voting control and the high issuance costs Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Understand the role of the finance function TOP: Entrepreneurial finance issues NAT: Reflective thinking 37. Determine the (after-tax) percentage cost of a $50 million debt issue that the Mattingly Corporation is planning to place privately with a large insurance company. Assume that the company has a 40% marginal tax rate. This long-term debt issue will yield 12% to the insurance company. a. 4.8% b. 7.2% c. 12.0% d. 10.6% Register to View AnswerSolution: ki = kd(1 - T) = 12%( 1- 0.40) = 7.2% PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital TOP: After-tax cost of debt calculation NAT: Analytic skills 38. Calculate the after-tax cost of preferred stock for Ohio Valley Power Company, which is planning to sell $100 million of $3.25 cumulative preferred stock to the public at a price of $25 per share. Flotation costs are $1.00 per share. Ohio Valley has a marginal income tax rate of 40%. a. 13.0% b. 7.8% c. 8.12% d. 13.54% Register to View AnswerSolution: kp = $3.25/($25 - $1) = 13.54% PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Cost of preferred calculation 39. The Allegheny Valley Power Company common stock has a beta of 0.80. If the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of equity capital for the firm (using the CAPM). a. 14.1% b. 7.6% c. 6.5% d. 13.0% Register to View AnswerSolution: ke = rf + (km - rf) = 6.5% + 0.80(16% - 6.5%) = 14.1% PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Cost of equity (CAPM) 40. The following financial information is available on Rawls Manufacturing Company: Current per share market price Current (t = 0) per share dividend Expected long-term growth rate $48.00 $3.50 5.0% Rawls can issue new common stock to net the company $44 per share. Determine the cost of internal equity capital using the dividend capitalization model approach. (Compute answer to the nearest 0.1%). a. 12.3% b. 13.4% c. 13.0% d. 12.7% Register to View AnswerSolution: ke = $3.50(1.05)/$48 + 0.05 = 0.1266 (or 12.7%) PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of internal equity - constant growth dividend... NAT: Analytic skills 41. The following financial information is available on Rawls Manufacturing Company: Current per share market price Beta Expected rate of return on market Risk-free rate $48.00 1.1 12.0% 6.0% Rawls can issue new common stock to net the company $44 per share. Determine the cost of internal equity capital using the capital asset pricing model approach. (Compute answer to the nearest 0.1%). a. 12.9% b. 12.6% c. 13.0% d. 11.8% Register to View AnswerSolution: ke = rf + (km- rf) = 0.06 + 1.1(0.12 - 0.06) = 0.126 = 12.6% PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of equity - CAPM approach NAT: Analytic skills 42. The following financial information is available on Rawls Manufacturing Company: Current per share market price Current per share dividend Current per share earnings Beta Expected rate of return on market Risk-free rate Expected long-term growth rate $48.00 $ 3.50 $ 6.00 1.1 12.0% 6.0% 5.0% Rawls can issue new common stock to net the company $44 per share. Determine the cost of external equity capital using the dividend capitalization model approach. (Compute answer to the nearest 0.1%). a. 12.7% b. 14.4% c. 12.6% d. 13.35% Register to View AnswerSolution: ke' = (D1/Pnet) + g = [$3.50(1.05)/$44] + 0.05 = 0.1335 or 13.4% PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of external equity - constant growth dividend... NAT: Analytic skills 43. Determine the weighted cost of capital for the Mills Company that will finance its optimal capital budget with $120 million of long-term debt (kd = 12.5%) and $180 million in retained earnings (ke = 16.0%). Mills' present capital structure is considered optimal. The company's marginal tax rate is 40%. (Compute answer to nearest .1%). a. 14.3% b. 12.6% c. 14.6% d. 11.9% Register to View AnswerSolution: ka = 0.40 x 12.5%(1 - 0.4) + 0.60 x 16.0% = 12.6% PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skill TOP: Weighted cost of capital 44. What is the cost of a preferred stock with a $100 par value that pays a $9.60 dividend per year? The security has a flotation cost of $3.37 and will be retired at its par value in 20 years. a. 9.6% b. 9.9% c. 10.0% d. 10.6% Register to View AnswerSolution: Try kp = 10% $9.60(8.514) + $100(0.149) = $96.63 PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of preferred stock - finite life NAT: Analytic skills 45. What is the cost of equity for East Roon, if the firm is expected to always pay a constant dividend of $2.22? The firm's common stock is presently selling for $18.50. a. 8.3% b. 12.0% c. 10.2% d. cannot be determined from the information given Register to View AnswerSolution: ke = $2.22/$18.50 = 0.12 or 12% PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of common equity - zero growth 46. According to Value Line, Bestway has a beta of 1.15. If 3-month Treasury bills currently yield 7.9 percent and the market risk premium is estimated to be 8.3 percent, what is Bestway's cost of equity capital? a. 17.45% b. 8.36% c. 9.55% d. 16.2% Register to View AnswerSolution: ke = 7.9% + 1.15(8.3%) = 17.45% PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of common equity - CAPM NAT: Analytic skills 47. Northeast Airlines (NA) has a current dividend of $1.80. Dividends are expected to grow at a rate of 7 percent a year into the foreseeable future. What is NA's cost of external equity if its stock can be sold to net $46 a share? a. 10.9% b. 11.2% c. 7.2% d. 21.0% Register to View AnswerSolution: ke = $1.80(1.07)/$46 + 0.07 = 0.112 or 11.2% PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of common equity - constant growth NAT: Analytic skills 48. A firm with a 40 percent marginal tax rate has a capital structure of $60,000,000 in debt and $140,000,000 in equity. What is the firm's weighted cost of capital if the marginal pretax cost of debt is 12 percent, the firm's average pretax cost of debt outstanding is 8%, and the cost of equity is 14.5 percent? a. 13.75% b. 11.59% c. 12.31% d. 10.45% Register to View AnswerSolution: ka = 0.3(0.12)(1 - 0.4) + 0.7(0.145) = 0.1231 or 12.31% PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital TOP: Weighted cost of capital calculation NAT: Analytic skills 49. Crickentree has a target capital structure of 30 percent debt and 70 percent equity. If the firm expects to have a net income of $1.7 million and a dividend payout ratio of 40 percent, what will be its equity break point? a. $2,428,571 b. $1,457,143 c. $3,400,000 d. $ 971,429 Register to View AnswerSolution: x = $1.7(1 - 0.4)/0.7 = $1.457 or $1,457,143 PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Break point calculation 50. Easy Slider Inc. sold a 15 year $1,000 face value bond with a 10 percent coupon rate. Interest is paid annually. After flotation costs, Easy Slider received $928 per bond. Compute the after-tax cost of debt for these bonds if the firm's marginal tax rate is 40 percent. a. 6.0% b. 7.2% c. 7.8% d. 6.6% Register to View AnswerSolution: (try 11%) ki = 11%(0.6) = 6.6% $928 = $100(7.191) + $1000(0.209) $928 so kd = 11% ki = 11%(0.6) = 6.6% PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Cost of debt 51. Easy Slider recently sold a 15 year $1,000 face value bond at a discount for $700 that net the firm $692 after flotation costs. The low coupon bond has a 6% coupon with interest paid semiannually. If Easy Slider has a marginal tax rate of 40 percent, what is its after-tax cost of debt for these bonds? a. 10.0% b. 6.0% c. 9.2% d. 7.8% Register to View AnswerSolution: (Try 5% semiannually ): $692 = $30(15.373) + $1,000(0.231) = $692 Therefore kd = 10% and ki = 10%(1 - 0.4) = 6% PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Cost of debt 52. Alpha Products maintains a capital structure of 40 percent debt and 60 percent common equity. To finance its capital budget for next year, the firm will sell $50 million of 11 percent debentures at par and finance the balance of its $125 million capital budget with retained earnings. Next year Alpha expects net income to grow 7 percent to $140 million, and dividends also are expected to increase 7 percent to $1.40 per share and to continue growing at that rate for the foreseeable future. The current market value of Alpha's stock is $30. If the firm has a marginal tax rate of 40 percent, what is its weighted cost of capital for the coming year? a. 9.64% b. 8.63% c. 9.84% d. 11.67% Register to View AnswerSolution: ke = $1.40/$30 + 0.07 = 0.1167 ka = 0.6(0.1167) + 0.4(0.11)(1 - 0.4) = 0.0964 or 9.64% PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Weighted cost of capital 53. Wellington Gas has a target capital structure of 50 percent common equity, 40 percent debt, and 10 percent preferred stock. The cost of retained earnings is 16 percent, and the cost of new equity (external) is 16.7 percent. Wellington can sell debentures that will have an after-tax cost of 8.3 percent and the after-tax cost of preferred stock will be 11.9 percent. What is the marginal cost of capital before and after the break point? a. 12.51% and 12.86% b. 11.18% and 11.53% c. 14.23% and 14.68% d. 12.51% and 11.53% Register to View AnswerSolution: ka1 = 0.5(0.16) + 0.4(0.083) + 0.1(0.119) = 0.1251 ka2 = 0.5(0.167) + 0.4(0.083) + 0.1(0.119) = 0.1286 PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Weighted cost of capital 54. GQ earned $740,000 before taxes this year. The firm has a debt ratio of 30 percent, a marginal tax rate of 35 percent, and a dividend payout ratio of 40 percent. GQ has no preferred stock. What is GQ's break point for equity? a. $634,286 b. $962,000 c. $412,286 d. $288,600 Register to View AnswerSolution: Retained earnings = $740,000(1 - 0.35)(1 - 0.4) = $288,600 Break point =$288,600/0.7 = $412,286 PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Break point determination 55. Groves, Inc. pays an annual dividend of $1.22. This dividend is expected to continue growing at a rate of about 5 percent each year. The firm is in a fairly risky business and has a beta of 1.45. The expected market rate of return is 13.5 percent, and the risk-free rate is 9.3 percent. What is the cost of equity for Groves? a. 19.6% b. 13.5% c. 15.4% d. 6.1% Register to View AnswerSolution: ke = 0.093 + 1.45(0.135 - 0.093) = 0.154 PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Cost of equity - CAPM 56. PDQ Inc. a has weighted cost of capital of 14.6 percent and has an opportunity to invest in the following average risk projects: Project 1 2 3 Cost $10,000 $21,000 $18,500 Annual Cost Flow $1,992.43 $4,526.84 $4,580.34 Project life 10 years 8 years 7 years In which projects should PDQ invest? Assume no capital rationing. a. 1 & 2 b. 2 & 3 c. 1 & 3 d. cannot be determined from the information provided Register to View AnswerSolution: IRR1 = $10,000/$1,992.43 = 5.019 so IRR = 15% IRR2 = $21,000/$4,526.84 = 4.639 so IRR = 14% IRR3 = $18,500/$4,580.34 = 4.039 so IRR = 16% Invest in projects 1 and 3 because their IRR is greater than 14.6% PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital TOP: Calculation of optimal capital budget NAT: Analytic skills 57. Mid-South Utilities will sell $10 million of $100 par value preferred stock that will pay an annual dividend of $9.75. Mid-South will receive $93.98 per share after flotation costs. If the issue must be retired in 20 years, what is the cost of the preferred issue? a. 10.37% b. 10.50% c. 10.23% d. 9.75% Register to View AnswerSolution: 10.5 % (by calculator) PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills LOC: knowledge of capital budgeting and cost of capital TOP: Cost of finite maturity preferred stock 58. Witin's stock price is currently $34.25 and the current quarterly dividend is $0.25. Consensus estimates for Witin indicate a growth rate in earnings of 10% into the foreseeable future. If Witin plans to sell 1 million shares to raise new capital for expansion, what is the cost of new equity if the issuance costs are 8%? a. 13.49% b. 10.87% c. 13.21% d. 13.17% Register to View AnswerSolution: ke = 1.00(1.10) + .10 = .1349 or 13.49% 31.51 PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Cost of equity 59. Weltron has a target capital structure of 35% debt and 65% equity. If the firm expects net income of $12.3 million and an annual dividend of $0.12 per share, what is the expected equity break point? There are 12 million shares outstanding. a. $18,923,076 b. $16,707,692 c. $10,061,538 d. $ 2,215,385 Register to View AnswerSolution: Payout = 12,000(.12) = $1,440,000 BP = (12.3 - 1.44)/.65 = $16,707,692 PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Break point for equity 60. Pluega Inc. issued a $100 million 8.27% coupon debenture bond due in the next 20 years. The bonds each sold for $996. If the bonds pay interest semi-annually, what is Pluega's after cash cost of debt? Assume 40% tax rate. a. 4.96% b. 8.30% c. 4.99% d. 3.32% Register to View AnswerSolution: 8.31(1-.4) = 4.986 or 4.99% (by calculator) PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Cost of debt 61. Haulsee Inc. pays no dividend currently but is expected to start paying a small dividend next year. The 5-year old firm has a beta of 1.25 and current earnings of $0.90 per share. The current Treasury bill rate is 6.10% and the market risk premium is 8.8%. Determine Haulsee's cost of equity if the firm's tax rate is 40%. a. 9.48% b. 17.1% c. 14.9% d. cannot determined from the information provided Register to View AnswerSolution: ke = 6.10 + 1.25(8.8) = 17.1% PTS: 1 OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Cost of equity 62. Sharp's current capital structure of 60 percent equity, 35 percent debt, and 5 percent preferred stock is considered optimal. This year Sharp expects to have earnings after tax of $3.6 million and to pay out $600,000 in dividends. Sharp can also raise up to $2 million in long-term debt at a pretax interest rate of 10.6 percent (all debt over $2 million will cost 11.4% pretax), and sell preferred stock at a cost of 11.5 percent. Sharp's marginal tax rate is 40 percent. The current value of Sharp's common stock is $36 and a dividend of $2.15 is expected to be paid during the coming year. Dividends have been growing at an annual compound rate of 8 percent a year and are expected to continue growing at that rate. New shares can be sold to net the firm $34.50. Sharp has an opportunity to invest in the following capital projects. Which one(s) should be accepted? Project 1 2 3 a. b. c. d. Cost $3.0 million $2.5 million $2.0 million Annual Cash Flow $552,893 $693,481 $345,220 Project Life 10 years 5 years 10 years 1 and 2 1 and 3 1, 2, and 3 cannot be determined from the information provided Register to View AnswerSolution: Equity break point = $3,000,000/0.6 = $5,000,000 Debt break point = $2,000,000/0.35 = $5,714,286 ke = $2.15/$36 + 0.08 = 0.140 ki = 0.106(1 - 0.4) = 0.0636 k'e = $2.15/$34.50 + 0.08 = 0.142 ka1 = 0.6(0.140) + 0.35(0.0636) + 0.05(0.115) = 0.112 ka2 = 0.6(0.142) + 0.35(0.0636) + 0.05(0.115) = 0.113 ka3 = 0.6(.142) + 0.35(0.114)(0.6) + 0.05(0.115) = 0.115 IRR1 = $3,000,000/$552,893 = 5.426 or 13% IRR2 = $2,500,000/$693,481 = 3.605 or 12% IRR3 = $2,000,000/$345,220 = 5.793 or 11.4% (by calculator) PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills LOC: Knowledge of capital budgeting and cost of capital TOP: Weighted cost of capital and optimal capital structure 63. Far Out Tech (FOT) has a debt ratio of 0.3 and it considers this to be its optimal capital structure. FOT has no preferred stock. FOT has analyzed four capital projects for the coming year as follows: Project 1 2 3 4 Net Investment $3,000,000 $1,500,000 $2,000,000 $1,600,000 IRR 13.5% 18.0% 12.6% 16.0% FOT expects to earn $2.7 million after tax next year and pay out $700,000 in dividends. Dividends are expected to be $1.05 a share during the coming year and are expected to grow at a constant rate of 10 percent a year for the foreseeable future. The current market price of FOT stock is $22 and up to $2 million in new equity can be raised for a flotation cost of 10 percent. If more than $2 million is sold then the flotation cost will be 15 percent. Up to $2 million in debt can be sold at par with a coupon rate of 10 percent. Any debt over $2 million will carry a 12 percent coupon rate and be sold at par. If FOT has a marginal tax rate of 40 percent, in which projects should it invest? a. 1, 2, 3, & 4 b. 2 c. 1, 2, and 4 d. 2 and 4 Register to View AnswerSolution: Break point for common equity = $2,000,000/0.7 = $2,857,143 Second equity break point = $4,000,000/0.7 = $5,714,286 Debt break point = $2,000,000/0.3 = $6,666,667 ke = $1.05/$22 + 0.10 = 0.148 k'e1 = $1.05/$19.80 + 0.10 = 0.153 k'e2 = $1.05/$18.70 + 0.10 = 0.156 ka1 = 0.7(0.148) + 0.3(0.10)0.6 = 0.122 ka2 = 0.7(0.153) + 0.3(0.10)0.6 = 0.125 ka3 = 0.7(0.156) + 0.3(0.10)0.6 = 0.127 ka4 = 0.7(0.156) + 0.3(0.12)0.6 = 0.131 PTS: 1 OBJ: TYPE: C. Prob. LOC: Knowledge of capital budgeting and cost of capital TOP: Weighted cost of capital and optimal capital structure NAT: Analytic skills 64. Temple Company's common stock dividends have grown over the past 5-year period from $0.60 per share to $0.89 (today). Assume that Temple's dividends are expected to grow at this rate for the foreseeable future. Temple's stock is currently selling for $12 per share. New common stock can be sold to net the company $11 per share. Determine the costs of internal and external equity to Temple. a. 18.1%; 18.9% b. 15.9%; 16.6% c. 16.2%; 16.9% d. 15.9%; 18.9% Register to View AnswerSolution: $0.89 = $0.60 (FVIFg, 5 ) g = 8.2% by calculator or interpolation ke = $0.96/$12 + 0.082 = 0.162 or 16.2% k'e = $0.96/$11 + 0.082 = 0.169 or 16.9% PTS: 1 OBJ: TYPE: C. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Cost of equity capital 65. Whipple Industries, Inc. is in the process of determining its optimal capital budget for next year. The following investment projects are under consideration: Required Investment $2 million 3 million 1 million 4 million 1 million 3 million 5 million Project A B C D E F G Expected Rate of Return 20.0% 15.0 13.5 13.0 12.5 12.0 11.5 The firm's marginal cost of capital schedule is as follows: Amount of Funds Raised $0 - $6 million $6 million - $12 million $12 million - $18 million Over $18 million Cost 12.0% 12.5% 13.5% 15.0% Determine Whipple's optimal capital budget (in dollars) for the coming year. a. $11 million b. $10 million c. $5 million d. $14 million Register to View AnswerSolution: Project A B C D E F G Required Investment $2 3 1 4 1 3 5 million million million million million million million Cumulative Investment $2 5 6 10 11 14 19 million million million million million million million Expected Rate of Return 20.0% 15.0 13.5 13.0 12.5 12.0 11.5 Marginal Cost of Capital 12.0% 12.0 12.0 12.5 12.5 12.5 and 13.5 13.5 and 15.0 Optimal Capital budget: $11 million (Projects A,B,C.D,E) PTS: 1 OBJ: TYPE: C. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Optimal capital budget 66. American Dental Laser is selling a 10 year $1,000 face value bond with a 8% coupon rate. Interest is paid annually. The price to the public is $820 and the issue costs per bond are $10 each. Compute the pretax cost of debt for these bonds. a. 11.1% b. 11.3% c. 11.5% d. 11.8% Register to View AnswerSolution: $810 = $80(PVIFAkd,10) + $1000(PVIFkd,10) try 11%: $80(5.889) + $1000(0.352) = $823.12 try 12%: $80(5.650) + $1000(0.322) = $774.00 kd = 11% + $13.12 (12% - 11%) = 11.3% $13.12 + $36 PTS: 1 OBJ: TYPE: C. Prob. LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of debt--deep discount bond NAT: Analytic skills 67. Mid-States Utility Company just issued at $3.20 cumulative preferred stock at a price to the public of $30 a share. The flotation costs were $1.50 a share and the issue will be retired in 20 years at its $30 par value. What is the cost of this preferred issue? a. 11.3% b. 10.3% c. 10.7% d. 11.6% Register to View AnswerSolution: $28.50 = $3.20(PVIFAkp,20) + $30(PVIFkp,20) try 11%: $3.20(7.963) + $30(0.124) = $29.20 try 12%: $3.20(7.469) + $30(0.104) =$27.02 kp = 11% + $0.70 $0.70 + $1.48 (12% - 11%) = 11.3% PTS: 1 OBJ: TYPE: C. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Cost of preferred stock 68. Wright Express(WE) has a capital structure of 30% debt and 70% equity. WE is considering a project that requires an investment of $2.6 million. To finance this project, WE plans to issue 10-year bonds with a coupon interest rate of 12%. Each of these bonds has a $1,000 face value and will be sold to net WE $980. If the current risk-free rate is 7% and the expected market return is 14.5%, what is the weighted cost of capital for WE? Assume WE has a beta of 1.20 and a marginal tax rate of 40%. a. 14.9% b. 12.4% c. 13.4% d. 16.0% Register to View Answer Solution: try 12%: $120(5.650) + $10000(.322) = $1,000 try 13%: $120(5.426) + $1000(0.295) = $946.12 kd = 12% + $20 $20 + $33.88 (13% - 12%) = 12.4% ke = 7% + $1.20(14.5% - 7%) = 16% ka = 0.3(12.4%)(1 - 0.4) + 0.7(16%) = 13.4% PTS: 1 OBJ: TYPE: C. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Weighted cost of capital 69. California Best (CB), a sport shoe store, expects an operating income of $2.3 million this year. CB has no long-term debt. The firm is considering as expansion project. The current risk-free rate of return is 7% and the current market risk premium is 8.3%. If CB's beta is 20% greater than the overall market, what is the firm's cost of capital? Assume that CB has a marginal tax rate of 40%. a. 8.3% b. 16.96% c. 9.96% d. 15.3% Register to View AnswerSolution: ka = ke = 7% + 1.2(8.3%) = 16.96% PTS: 1 OBJ: TYPE: C. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Cost of equity 70. Columbia Gas Company's(CG) current capital structure is 35% debt and 65% equity. This year CG has earnings after tax of $5.31 million and is paying $1.6 million in dividends. To finance a transmission pipe line, CG can borrow $2 million at a cost of 10%, the same rate that CG is currently paying on a total of $15 million long-term debt. CG has 1,000,000 shares outstanding and its current market price is $31. If CG's long-term growth rate of dividends is expected to be 8%, what is the weighted cost of capital for the firm? Assume a marginal tax rate of 40%. a. 10.9% b. 13.6% c. 19.6% d. 16.9% Register to View AnswerSolution: kd = 10%(1 - 0.4) = 6% ke = $1.6(1.08)/$31 + 0.08 = .136 or 13.6% ka = 0.35(6%) + 0.65(13.6%) = 10.9% PTS: 1 OBJ: TYPE: C. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Weighted cost of capital 71. Heleveton Industries is 100% equity financed. Its current beta is 1.1. The expected market risk premium is 8.5% and the risk-free rate is 4.2%. If Heleveton changes its capital structure to 25% debt, it estimates its beta will increase to 1.2. If the after-tax cost of debt will be 6%, should Heleveton make the capital structure change? a. b. c. d. Yes, cost of capital decreases by 2.52% Yes, cost of capital decreases 1.67%. No, stock price would decrease due to increased risk No, cost of capital increases by 0.85%. Register to View AnswerSolution: Old ke = 4.2 + 1.1(8.5) = 13.55% = ka New ke = 4.2 + 1.2(8.5) = 14.4% New ka = .7(14.4) + .3(6) = 11.88% Stock price is maximized where the cost of capital is minimized. PTS: 1 OBJ: TYPE: C. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Cost of capital 72. Sadaplast has a target capital structure of 65% common equity, 30% debt, and 5% preferred stock. The cost of retained earnings is 14% and the cost of new equity is 15.5%. Sadaplast expects to have a net income of $85 million in the coming year. If the firm sells bonds, up to $25 million can be sold at par value to yield an after-tax cost of 5.4%. An additional $20 million of debentures could be sold to yield an after-tax cost of 7.0%. The after-tax cost of preferred stock financing is estimated to be 11%. Sadaplast has a dividend payout ratio of 25%. What is Sadaplast's cost of capital between the first and second break points? a. 12.25% b. 11.27% c. 11.75% d. 12.73% Register to View AnswerSolution: RE = .75($85 million) = $63.75 million BPe = $63.75 million / 0.65 = $98.077 million BPd = $25 million / 0.30 = $83.333 million BPd' = $45 million / .30 = $150 million ka = 0.65(0.14) + 0.30(0.07) + 0.05(0.11) = 0.1175 or 11.75% PTS: 1 OBJ: TYPE: C. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Weighted cost of capital 73. Bay State Technology has determined that its cost of equity is 15% and its after-tax cost of debt is 7.2%. Bay State expects to earn $14 million after taxes next year and, as a new firm, does not pay any dividends. The stock sells for $24. Bonds are currently selling at par value. Compute Bay State's weighted cost of capital. A partial balance sheet is shown below: Current liabilities Long-term debt Common stock at $1 par Paid in capital Retained earnings Total liabilities and stockholders' equity a. 13.4% b. 13.1% c. 11.6% $ 300,000 1,000,000 100,000 900,000 3,000,000 $5,300,000 d. 12.7% Register to View AnswerSolution: Capital structure: Debt = Market value of Equity: 100,000 shares($24) = Total $1,000,000 2,400,000 $3,400,000 Capital structure: Debt = $1/$3.4 = 29.41% Equity=2.4/3.4 = 70.59% ka = 0.2941(7.2%) + 0.7059(15.0%) = 12.71% PTS: 1 OBJ: TYPE: C. Prob. LOC: Knowledge of capital budgeting and cost of capital TOP: Capital structure and cost of capital NAT: Analytic skills 74. Mahlo is planing to diversify into the bakery industry. As a result, its beta should drop from 1.4 to 1.2 and the expected long-term growth rate of dividends will drop from 12% to 9%. The risk-free rate is 4%, the expected market risk premium is 9%, and the current dividend per share paid by Mahlo is $2.10. Should Mahlo complete the diversification into the bakery industry? a. No, stock price drops about $11.70 b. Yes, stock price increases about $9.40 c. Yes, stock price increases about $1.80 d. No, stock price drops about $9.40 Register to View AnswerSolution: Current ke = 0.04 + 1.4(0.09) = 0.166 or 16.6% P0 = $2.10(1.12) / (0.166 - 0.12) = $51.13 New ke = 0.04 + 1.2(0.09) = 0.148 or 14.8% New P0 = $2.10(1.09) / (0.148 - 0.09) = $39.47 PTS: 1 OBJ: TYPE: C. Prob. LOC: Knowledge of capital budgeting and cost of capital NAT: Analytic skills TOP: Cost of capital 75. Which of the following statements regarding the cost of capital is/are correct? I. The weighted cost of capital is the discount rate used when computing the net present value. II. The after-tax cost of capital is weighted by the proportions of the capital components in the firms long-range target capital structure. a. I only b. II only c. Both I and II d. Neither I nor II Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital NAT: Reflective thinking TOP: Weighted cost of capital 76. The cost of debt must account for all of the following inputs EXCEPT: a. Bond ratings. b. Issuance costs. c. flotation costs. d. The tax rate. Register to View Answer PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of debt 77. There are two primary ways that capital is raised. Which of the following statements is/are correct? I. Capital is raised internally by using retained earnings. II. Capital is raised externally by selling fixed assets. a. I only b. II only c. Both I and II d. Neither I nor II Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital NAT: Reflective thinking TOP: Cost of equity capital 78. Investors can form earnings growth expectations from various sources, including a. potential sales growth. b. current earnings and retention rates. c. assumed product development. d. investors required rate of return. Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Understand the role of the finance function NAT: Reflective thinking TOP: Issues in implementation 79. What is the weighted average cost of capital for Mud Bug Corporation? Source of Capital Capital Components Cost Long Term Debt $60,000 5.6% Preferred Stock $15,000 10.6% Common Stock $75,000 13.0% a. b. c. d. 6.9% 8.5% 10.2% 9.8% Register to View AnswerPTS: 1 NAT: Analytic skills TOP: Weighted cost of capital OBJ: TYPE: E. Prob. LOC: Knowledge of capital budgeting and cost of capital 80. Zappin Skeeters Corporation needs to know its cost of retained earnings. Based on the following information, compute the cost of retained earnings: The stock sells for $25, flotation costs are $3 and the firm is in the 35% tax bracket. Year 2004 2003 2002 2001 Dividend $1.55 $1.40 $1.35 $1.32 a. 15.71% b. 9.11% c. 12.56% d. 10.72% Register to View AnswerPTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of internal equity - constant growth dividend... 81. The cost of internal equity is cheaper than the cost of external equity. Which of the following statements is/are correct? I. External equity may incur expenses which are deducted from the capital received for the sale of the security. II. Corporations generally discount the price of the securities that are sold to the public in order to raise capital. a. I only b. II only c. Both I and II d. Neither I nor II Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of external equity capital NAT: Reflective thinking 82. What is the cost of preferred stock if the stock is selling for $208, the dividend is $35 and flotation costs are 5% of the selling price? a. 17.7% b. 25.2% c. 12.5% d. 10.8% Register to View AnswerPTS: 1 NAT: Analytic skills TOP: Cost of preferred calculation OBJ: TYPE: E. Prob. LOC: Cost of capital 83. What would be the weighted average cost of capital for Limp Linguini Noodle Makers, Inc. under the following conditions: *The capital structure is 40% debt and 60% equity *The before-tax cost of debt (which includes flotation costs) is 20% and the firm is in the 40% tax bracket. *The firms beta is 1.7 *The risk-free rate is 7% and the market risk premium is 6% a. b. c. d. 15.12% 18.7% 17.2% 12% Register to View AnswerDetermine the cost of equity: 1.7(6%) + 7% = 17.2% Determine the cost of debt: 20% X .60 = 12 Determine the weighted cost of capital: 17.2(.60) + 12(.40) = 15.12% PTS: 1 OBJ: TYPE: C. Prob LOC: Knowledge of capital budgeting and cost of capital TOP: Computing the component costs of capital NAT: Analytic skills 84. A firm has a beta of 1.2. The return in the market is 14% and the risk-free rate is 6%. The estimated cost of common stock equity is: a. 6% b. 7.2% c. 15.6% d. 14% Register to View AnswerSolution: 1.2 (14% - 6%) + 6% = 15.6% PTS: 1 OBJ: TYPE: E. Prob LOC: Knowledge of capital budgeting and cost of capital TOP: Computing the component costs of capital NAT: Analytic skills 85. The optimal capital budget occurs at the point where two curves intersect. Which of the following is one of those curves? I. Weighted marginal cost of capital curve II. Investment opportunity curve a. b. c. d. I only II only Both I and II Neither I nor II Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital TOP: Determining the optimal capital budget NAT: Reflective thinking 86. The cost of common stock equity may be estimated by using which of the following? a. Earnings curve b. Dupont analysis c. Capital asset pricing model d. Price/Earnings ratio Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of external equity capital NAT: Reflective thinking 87. A firm is determining its cost of common stock equity. It last paid a divided of $.52, the dividends are growing at 5%, flotation costs are $2 per share and the firm will net $72 per share upon the sale of the stock. What is the firms cost of common equity? a. 3.49% b. 8.22% c. 6.11% d. 5.76% Register to View AnswerSolution: $.52 (1 + .05) = $.55 (.55/72) + .05 = 5.75% PTS: 1 OBJ: TYPE: E. Prob LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of external equity capital NAT: Analytic skills 88. Surfin Bubba Surfboard Shop is currently selling for $34.25 a share with a current dividend of $1.00. It is estimated that Surfin Bubba will have a growth rate in earnings of 10% into the foreseeable future. If Surfin Bubba plans to raise new capital for expansion, what is the cost of new equity if flotation costs are 8% of the price. a. b. c. d. 13.49% 11.57% 12.21% 10.87% Register to View AnswerSolution: 1.00 X 1.10 = $1.10 1.10 (34.25 x .92) + .10 = 13.49% PTS: 1 OBJ: TYPE: E. Prob LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of external equity capital NAT: Analytic skills 89. What is Bodacious Bodywears weighted average cost of capital under the following conditions: * The firm has 30% debt, 10% preferred stock, and 60% equity *The cost of common equity is 14% and the cost of preferred stock is 9% * The firms debt has a before-tax cost of debt of 10% (including flotation costs) * The firm is in the 40% tax bracket a. 11.1% b. 8.5% c. 12.3% d. 10.5% Register to View AnswerSolution: (.60 X 14%) + (.10 X 9%) + (10% X .6 X .30) = 11.1% PTS: 1 OBJ: TYPE: E Prob LOC: Knowledge of capital budgeting and cost of capital TOP: Computing the component costs of capital NAT: Analytic skills 90. In determining the cost of debt, several factors must be considered. All of the following are those factors EXCEPT: a. the firms before-tax cost of debt b. the firms tax rate c. flotation costs d. the firms growth rate of dividends Register to View AnswerPTS: 1 OBJ: TYPE: Fact LOC: Knowledge of capital budgeting and cost of capital NAT: Reflective thinking TOP: Cost of debt ESSAY 1. In considering the SML concept, the required returns for any individual security are dependent on certain values. List and discuss those values. ANS: 1. The risk-free rate: The 3-month or 6-month Treasury Bill rate is generally used for this value. 2. The expected market return: This is the return that investors expect to earn on stocks with a beta of 1.0. 3. The beta of the corporation: Beta is normally estimated by using historic values reflecting the relationship between a securitys returns and the market returns. PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital; Understand risk and return TOP: Capital asset pricing model (CAPM) approach 2. What are the reasons that the cost of external equity is greater than the cost of internal equity? ANS: 1. External equity has issuance costs associated with new shares. These costs are generally significant enough that they cannot be ignored. 2. The price of the new shares being sold to the public is normally set to an amount less than the market price of the stock before the announcement of the new issue. PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of external equity capital 3. Firms can raise capital in two ways. Why is it that internal funding does not have a zero cost? ANS: Firms using internal funding, or retained earnings, incur an opportunity cost. When funds are generated through the earnings of the firm, either managers can pay out funds as dividends to common stockholders, or the funds can be retained and reinvested in the firm. If the funds are paid out to stockholders, they could reinvest the funds elsewhere to earn an appropriate return, given the risk of the investment. If managers decide to retain earnings and reinvest them in the firm, there must be investment opportunities in a firm offering a return equivalent to the returns available to stockholders in alternative investments on a risk-adjusted basis. PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital TOP: Cost of internal equity capital 4. How is the marginal cost of the various component capital sources determined? ANS: The marginal cost of funds is the cost of the next increments of capital raised by the firm. When computing the marginal cost of the various component capital sources, companies typically estimate the component costs they anticipate encountering, or paying, during the coming year. If capital costs change significantly during the year, it may be necessary to recompute the new capital costs and use the new estimates when evaluating projects from that time forward, PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital TOP: Computing the component costs of capital; Marginal costs 5. What is the investment opportunity curve and how is it accomplished? ANS: The investment opportunity curve is the graph which illustrates the comparison between the expected project return to the companys marginal cost of capital schedule. It is accomplished by first plotting the returns expected from the proposed capital expenditure projects against the cumulative funds required. The optimal capital budget is indicated by the point at which the investment opportunity curve and the marginal cost of capital curve intersect. PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital TOP: Determining the optimal capital budget

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TAMU Commerce - FIN - 504
Chapter 13CAPITAL STRUCTURE CONCEPTSMULTIPLE CHOICE1. In analyzing the value of the firm as a function of capital structure, the present value of the tax shieldbenefit is offset by the present value of the expected _, resulting in an interior optimal c
TAMU Commerce - FIN - 504
Chapter 14CAPITAL STRUCTURE MANAGEMENT IN PRACTICEMULTIPLE CHOICE1. Raw material and direct labor costs are examples ofa. fixed costsb. overhead costsc. variable costsd. capital costsANS: CPTS: 1OBJ: TYPE: FactLOC: Knowledge of capital budgeting
TAMU Commerce - FIN - 504
Chapter 15DIVIDEND POLICYMULTIPLE CHOICE1. The dividend clientele effect concept was originally developed bya. Myron Gordonb. Merton Miller and Franco Modiglianic. Milton Friedmand. Paul SamuelsonANS: BPTS: 1LOC: Understand stocks and bondsOBJ:
TAMU Commerce - FIN - 504
Chapter 16WORKING CAPITAL POLICY AND SHORT-TERM FINAN CINGMULTIPLE CHOICE1. The length of the operating cycle is equal to the length of thea. inventory conversion periodb. receivables conversion periodc. cash conversion periodd. a plus bANS: DPTS:
TAMU Commerce - FIN - 504
Chapter 17THE MANAGEMENT OF CASH AND MARKETABLE SECUR ITIESMULTIPLE CHOICE1. Which of the following methods is (are) used to transfer surplus funds from local (collection) bank ac counts to concentration (disbursement) bank accounts?a. wire transfersb
TAMU Commerce - FIN - 504
Chapter 18MANAGEMENT OF ACCOUNTS RECEIVABLE ANDINVENTORIESMULTIPLE CHOICE1. The credit policy variables that a firm can use to exercise control over its level of receivablesinvestment includea. credit standardsb. credit termsc. collection effortd.
TAMU Commerce - FIN - 504
Chapter 19LEASE AND INTERMEDIATE TERM FINANCINGMULTIPLE CHOICE1. In the net advantage to leasing calculation, all cash flows (except salvage value) are discounted at thefirm'sa. weighted (marginal) cost of capitalb. cost of internal equity capitalc.
TAMU Commerce - FIN - 504
Chapter 20FINANCING WITH DERIVATIVESMULTIPLE CHOICE1. _ are forms of options.a. Warrantsb. Convertible securitiesc. Leasesd. Warrants and convertible securitiesANS: DPTS: 1LOC: Understand derivative marketsOBJ: TYPE: FactTOP: IntroductionNAT:
TAMU Commerce - FIN - 504
Chapter 21RISK MANAGEMENTMULTIPLE CHOICE1. Which of the following statements about risk is/are correct?I. Risk is the possibility that the actual cash flows will be different that the expected cash flows.II. Risk management is utilized by companies in
TAMU Commerce - FIN - 504
Chapter 22INTERNATIONAL FINANCIAL MANAGEMENTMULTIPLE CHOICE1. Which of the following actions would not tend to increase the value of a country's currency?a. relatively low interest ratesb. government trade policies that limit importsc. relatively low
TAMU Commerce - FIN - 504
Chapter 23CORPORATE RESTRUCTURINGMULTIPLE CHOICE1. Forms of business combinations include:a. mergersb. consolidationsc. holding companies and consolidationsd. mergers, consolidations, and holding companiesANS: DPTS: 1OBJ: TYPE: FactLOC: Knowledg
FAU - ACCOUNTING - 4001
ch01Student: _1.Payment of a tax entitles the payer to a specific good or service from the government.True False2.A user fee entitles the payer to a specific good or service from the government.True False3.A tax is intended to deter or punish una
FAU - ACCOUNTING - 4001
ch02Student: _1.A tax meets the standard of sufficiency if it is easy for people to pay the tax.True False2.The federal government is not required to pay interest on the national debt.True False3.A static forecast of the revenue effect of a tax r
FAU - ACCOUNTING - 4001
ch03Student: _1.Net cash flow from a transaction equals the difference between cash received and cash disbursed in thetransaction.True False2.The present value of a dollar available in a future period increases as the discount rate increases.True
FAU - ACCOUNTING - 4001
ch04Student: _1.The goal of tax planning is to reduce tax costs or increase tax savings as much as possible.True False2.Tax avoidance is the reduction of a person's tax liability through illegal means.True False3.Tax evasion is a federal crime pu
FAU - ACCOUNTING - 4001
ch05Student: _1.Experienced tax professionals generally can answer most tax questions without the need for taxresearch.True False2.A single tax issue may result in multiple research questions.True False3.The first step in the tax research proces
FAU - ACCOUNTING - 4001
ch06Student: _1.For federal tax purposes, gross income from the sale of tangible goods is reduced by the seller's cost ofgoods sold.True False2.Taxable income is defined as gross income minus allowable deductions and credits.True False3.A taxpay
FAU - ACCOUNTING - 4001
ch07Student: _1.A basic premise of federal income tax law is that an expense is deductible unless the Internal RevenueCode specifically prohibits the deduction.True False2.The after-tax cost of an expenditure is minimized when the expenditure is de
FAU - ACCOUNTING - 4001
ch08Student: _1.Gain or loss realized on the disposition of property is recognized unless the tax law provides anonrecognition exception.True False2.According to the realization principle, an increase in the value of an asset is not accounted for a
FAU - ACCOUNTING - 4001
ch09Student: _1.Tax neutrality for asset exchanges is the exception rather than the rule.True False2.When unrelated parties agree to an exchange of noncash properties, the economic presumption is that theproperties are of equal value.True False3.
FAU - ACCOUNTING - 4001
ch10Student: _1.Haddie's Hats is a regular corporation. The business must file an income tax return each year to report itstaxable income or loss and pay any related taxes.True False2.A partnership is an unincorporated business activity owned by at
FAU - ACCOUNTING - 4001
ch11Student: _1.In terms of dispersal of ownership, corporations are classified as either closely held or publicly held.True False2.The corporate characteristic of limited liability is more important to the shareholders than thecharacteristic of ce
FAU - ACCOUNTING - 4001
ch12Student: _1.The net operating losses of a C corporation can be carried back to reduce its taxable income in prior taxyears.True False2.Bart owns 100% of an S corporation that had a net operating loss in the current year. If there is sufficient
FAU - ACCOUNTING - 4001
ch13Student: _1.In the United States, corporations are subject only to taxes imposed by the federal government.True False2.The federal income tax deduction allowed for state income taxes paid decreases the cost of the statetaxes.True False3.If a
FAU - ACCOUNTING - 4001
ch14Student: _1.Harry and Sally were married on December 23, 2011. Their income for the entire year is reported on ajoint return.True False2.A taxpayer who knowingly signs a joint return on which his spouse has failed to report her income isliable
FAU - ACCOUNTING - 4001
ch15Student: _1.The classification of a worker as an employee or an independent contractor determines how much payrolltax a company must pay.True False2.Employers must withhold state and federal income tax from compensation paid to independentcont
FAU - ACCOUNTING - 4001
ch16Student: _1.The tax consequences of a business activity are generally the same as the tax consequences of aninvestment activity.True False2.The income generated from an investment activity is primarily attributable to invested capital rather th
FAU - ACCOUNTING - 4001
ch17Student: _1.Chad won a car valued at $25,000 from a game show. Because he immediately donated the car to the RedCross, Chad can exclude $25,000 from gross income.True False2.Ben received a $5,000 tuition scholarship from his local community col
FAU - ACCOUNTING - 4001
ch18Student: _1.Employees who deliberately have excess income tax withheld from their salaries in order to receive a taxrefund are making an interest-free loan of the excess withholding to the government.True False2.An individual taxpayer is not re
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 2 An Introduction to Cost Terms and PurposesObjective 2.11) Cost objects include:A) productsB) customersC) departmentsD) All of these answers are correct.Answer: DDiff: 2Terms: cost objectObjec
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 3 Cost-Volume-Profit AnalysisObjective 3.11) Cost-volume-profit analysis is used primarily by management:A) as a planning toolB) for control purposesC) to prepare external financial statementsD) to
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 4 Job CostingObjective 4.11) Job costing information is used:A) to develop strategiesB) to make pricing decisionsC) for external financial reportingD) All of these answers are correct.Answer: DDi
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 5 Activity-Based Costing and Activity-Based ManagementObjective 5.11) If products are different, then for costing purposes:A) an ABC costing system will yield more accurate cost numbersB) a simple co
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 7 Flexible Budgets, Direct-Cost Variances, and Management ControlObjective 7.11) The master budget is:A) a flexible budgetB) a static budgetC) developed at the end of the periodD) based on the actu
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 8 Flexible Budgets, Overhead Cost Variances, and Management ControlObjective 8.11) Overhead costs have been increasing due to all of the following EXCEPT:A) increased automationB) more complexity in
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 9 Inventory Costing and Capacity AnalysisObjective 9.11) Which of the following cost(s) are inventoried when using variable costing?A) direct manufacturing costsB) variable marketing costsC) fixed m
FIU - ACG - 3341
Cost Accounting: A Managerial Emphasis, 14e (Horngren)Chapter 10 Determining How Costs BehaveObjective 10.11) Which of the following statements related to assumptions about estimating linear costfunctions is FALSE?A) Variations in a single cost drive
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 11 Decision Making and Relevant InformationObjective 11.11) A decision model involves:A) only quantitative analysesB) both quantitative and qualitative analysesC) only qualitative analysesD) a mana
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 12 Pricing Decisions and Cost ManagementObjective 12.11) Companies should only produce and sell units as long as:A) there is customer demand for the productB) the competition allows itC) the revenue
FIU - ACG - 3341
Cost Accounting: A Managerial Emphasis, 14e (Horngren)Chapter 13 Strategy, Balanced Scorecard, and Strategic Profitability AnalysisObjective 13.11) _ describes how an organization matches its own capabilities with the opportunitiesin the marketplace t
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 14 Cost Allocation, Customer-Profitability Analysis, and Sales-Variance AnalysisObjective 14.11) Costs which are NOT economically feasible to trace but which are related to a cost object are knownas:
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 15 Allocation of Support-Department Costs, Common Costs, and RevenuesObjective 15.11) The method that allocates costs in each cost pool using the same rate per unit is known as the:A) incremental cost
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 16 Cost Allocation: Joint Products and ByproductsObjective 16.11) What type of cost is the result of an event that results in more than one product or servicesimultaneously?A) byproduct costB) joint
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 18 Spoilage, Rework, and ScrapObjective 18.11) Managers often cite reductions in the costs of spoilage as a(n):A) major justification for implementing a just-in-time production systemB) measurement o
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 19 Balanced Scorecard: Quality, Time, and the Theory of ConstraintsObjective 19.11) Quality management provides an important competitive edge because it:A) reduces costsB) increases customer satisfac
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 20 Inventory Management, Just-in-Time, and Simplified Costing MethodsObjective 20.11) Which of the following industries would have the highest cost of goods sold percentage relative tosales?A) comput
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 21 Capital Budgeting and Cost AnalysisObjective 21.11) Which of the following involves significant financial investments in projects to develop newproducts, expand production capacity, or remodel curr
FIU - ACG - 3341
Cost Accounting, 14e (Horngren/Datar/Rajan)Chapter 23 Performance Measurement, Compensation, and Multinational ConsiderationsObjective 23.11) A report that measures financial and nonfinancial performance measures for various organizationunits in a sin
Saint Louis University-Main Campus - ENGL - 190
Joel VettimattamProfessor Lynn LinderEnglish 190-243 April 2012Annotated BibliographyFernando, Mayanthi. "Reconfiguring Freedom: Muslim Piety and the Limits of Secular Law andPublic Discourse in France." American Ethnologist. 37.1 (2010): 19-35. Pri
Saint Louis University-Main Campus - BIO - 106
Practice QuestionsChapters 32, 33, 34, and 35Dr. DodsonWhich of the following is NOT characteristic ofdeuterostome development?a. Radial cleavageb. Indeterminate developmentc. Blastopore that becomes mouthd. Mesoderm is formed from an out-pocketin
Strayer - SOCIOLOGY - 300
Sex selective abortions are not the reason why India is the worst place for women because theparent dreads to have them even though the process is illegal. This practice is more popular withwell-educated and well off people. India is well known for thei
Strayer - SOCIOLOGY - 300
DiscussionsWeek2Discussion1Is democracy the best governmental system? Would all nations benefit by have ademocratic structure?Ademocracywouldbethebestgovernmentalsystem,becausewehavetherightto votewhowillbeinoffice,wehavetherighttofreespeech,wedontha
Strayer - SOCIOLOGY - 300
Empowering Women ofSomaliaTo help empower the women in LDCs by educating and deterring femother injustices inflicted upon women of SomaliaPicking a particular Least Developed Country (LDC) was a tough choice there are manyto choose from. Finally, the
Strayer - SOCIOLOGY - 300
As the new African ambassador to Zamunda, I would need to learn about the culture of the three native clans to bemore informed about their religion and how it affects their lives. Then I would need to have a meeting with the elitelandowners, local leade
Strayer - SOCIOLOGY - 300
Soc 300 DiscussionsWeek 1Years of fighting in the Democratic Republic of Congo has deterred private investment,destroyed infrastructure, delayed development and substantially debilitated the ability ofgovernment institutions. Widespread corruption cha
Strayer - SOCIOLOGY - 300
Sociology of Developing Countries SOC 300SOC300038VA016*1118*001SOC300067VA016*1118*001Prerequisite: SOC100 or Instructors permissionQuarterMeeting Days/TimeSummer 2012Online, asynchronous, week-by-week units betweenMonday, July 2 and Sunday, Sept
Strayer - SOCIOLOGY - 300
Slide#1SOC300. Democratic Change and the Change to Democracy Week 2TopicNarrationIntroductionWelcome to our second session together in Sociologythree hundred. Session two will cover the topic ofDemocratic Change and the Change to Democracy.In se
Strayer - SOCIOLOGY - 300
SOC 300Sociologyof Developing CountriesWeek 2Democratic Change and the Change toDemocracyObjectivesUpon completion of Week 2 you will be able to:To learn the various ways of defining and understandingdemocracy.To identify characteristics that ma
Strayer - SOCIOLOGY - 300
Slide#1IntroTopicSOC300 Religion and Politics Week 3NarrationWelcome to our third week together in Sociology threehundred. In this weeks lesson, we are going to bediscussing the role of religion in the political arena ofThird World countries.In
Strayer - SOCIOLOGY - 300
SOC 300Sociologyof Developing CountriesWeek 3Religion and PoliticsObjectivesUpon completion of week 3 you will be able to: Understand the debate as to how religion can fit inmodernization theory or dependency theory Develop an understanding of th
Strayer - SOCIOLOGY - 300
SOC 300 The Politics of Cultural Pluralism and Ethnic Conflict Week 4SlideTopicNarration#1IntroductionWelcome to our fourth week together in Sociology threehundred. In this weeks lesson, we are going to discuss thePolitics of Cultural Pluralism a