CH15AQZV7 - Chapter 15 Quiz A Student Name _ _ 1. Student...

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Chapter 15 Quiz A Student Name _________________________ Student ID ____________ ________ 1. Big Bird & Company just paid their annual dividend in the amount of $1.20 a share. This dividend is expected to increase by 3 percent annually. The company’s stock is currently selling for $26.40 per share. What is the cost of equity? a. 4.68 percent b. 4.79 percent c. 7.55 percent d. 7.68 percent ________ 2. Ernie and Bert’s has a beta of 1.24. The risk-free rate of return is 4.2 percent and the market risk premium is 8 percent. What is the cost of equity? a. 8.91 percent b. 9.84 percent c. 14.12 percent d. 15.13 percent ________ 3. The 9 percent preferred stock of Flintstone & Son is currently selling for $64 a share. The par value per share is $100. What is the cost of preferred stock for this firm? a. 7.11 percent b. 9.00 percent c. 11.11 percent d. 14.06 percent ________ 4. The Road Runner Co. has a bond outstanding that matures in 6 years and carries a 5 percent coupon. Interest is paid annually. The bond is currently priced at 98 percent of its face value. What is the pre-tax cost of debt? a. 4.60 percent b. 4.72 percent c. 4.90 percent d. 5.40 percent ________ 5. Your firm has a cost of equity of 12 percent and a pre-tax cost of debt of 8 percent. You maintain a debt- equity ratio of .60 and have a tax rate of 34 percent. What is your firm’s weighted average cost of capital? a. 6.93 percent b. 7.41 percent c. 9.48 percent d. 10.50 percent ________ 6. The Radiant Co. has an overall cost of equity of 12 percent and a beta of .80. The risk-free rate of return is 4 percent. The firm is considering a project with a beta of 1.23 and a four-year life. What is an appropriate cost of equity for this project? a. 12.00 percent b. 14.76 percent c. 16.30 percent d. 16.58 percent ________ 7. If a firm uses their overall weighted average cost of capital as the discount rate for all of their proposed projects, then the firm will tend to: I. become riskier over time. II. accept projects which should be rejected. III. reject projects which should be accepted. IV. see their managers propose more high risk projects and less low risk projects. a. I and II only b. II and III only c. I, II, and III only d. I, II, III, and IV ________ 8. An increase in a leveraged firm’s tax rate will: a. not affect their cost of capital. b. increase their cost of capital. c. decrease their cost of capital. d. have an effect on the firm cost of capital but the direction of that effect cannot be predicted. ________ 9. The security market line approach: a. can only be used by firms which pay regular dividends. b. incorporates the systematic risk of a firm into the cost of equity. c. considers the total risk related to a firm. d. supports accepting any project with a rate of return that lies below the security market line.
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This note was uploaded on 05/29/2010 for the course FIN 325 taught by Professor Staff during the Spring '08 term at San Diego State.

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CH15AQZV7 - Chapter 15 Quiz A Student Name _ _ 1. Student...

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