# fmt14 - Chapter 15 Cost of Capital Chapter 15 Quiz A...

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Chapter 15 Cost of Capital Chapter 15 Quiz A Student Name _________________________ Student ID ____________ ________ 1. All else equal, the weighted average cost of capital for a firm will generally decrease when the: a. tax rate decreases. b.debt-equity ratio increases. c. cost of equity increases. d. market value of equity increases. ________ 2. The security market line approach: a. can only be used by firms which pay regular dividends. b. considers both the total risk associated with a stock and the risk-free rate of return. c. considers the systematic risk of a stock as compared to that of the overall market. d. values a security based on the risk-free rate and the amount of unsystematic risk inherent in a security. ________ 3. The managers of Gotham Enterprises are evaluating a new project and decided to base the required rate of return for the project on Bristol Industries cost of capital. Bristol Industries is not owned or controlled by Gotham Enterprises. The managers are employing a strategy known as: a. the subjective approach. b. pure play. c. weighting the cost of capital d. the divisional cost of capital. ________ 4. Big Boy Equipment, Inc. is expected to pay an annual dividend in the amount of \$1.45 a share next year. This dividend is expected to increase by 4 percent annually. The company’s stock is currently selling for \$32.20 per share. What is the cost of equity? a. 4.50 percent b. 4.68 percent c. 8.50 percent d. 8.68 percent ________ 5. The Shoe Co. has a beta of .96. The risk-free rate of return is 4.6 percent and the expected return on the market is 13.5 percent. What is the cost of equity? a. 12.96 percent b. 13.14 percent c. 15.64 percent d. 17.56 percent ________ 6. The 8 percent preferred stock of Snowmobiles, Inc. is currently selling for \$55.25 per share. If the par value is \$100, what is the cost of preferred stock to the firm? a. 3.62 percent b. 8.00 percent c. 14.48 percent d. 16.00 percent ________ 7. The Textile Co. has a bond outstanding that matures in 10 years, carries a 6 percent coupon, and pays interest annually. The bond has a market value of \$1,037.69. The company has a corporate tax rate of 34 percent. What is the aftertax cost of debt? a. 3.63 percent b. 3.96 percent c. 5.50 percent d. 6.00 percent ________ 8. Al’s Wooden Sheds has a cost of equity of 11 percent and a pre-tax cost of debt of 7 percent. The firm maintains a debt-equity ratio of .5 and has a tax rate of 35 percent. What is the firm’s weighted average cost of capital? a. 7.13 percent b. 8.42 percent c. 8.85 percent d. 9.16 percent ________ 9. The Cola Co. is an all equity company that distributes soft drinks. The Cola Co. has 50,000 shares of stock outstanding at a market price of \$22.56 per share and has a beta of 1.2. The Cola Co. is considering expanding into the potato chip and snack market. Potatoes and More is an all equity company that is currently involved with the snack foods market. Potatoes and More has 100,000 shares of stock outstanding at

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## This note was uploaded on 12/11/2010 for the course FIN FIN201 taught by Professor Mohdhassan during the Spring '10 term at American University of Sharjah.

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fmt14 - Chapter 15 Cost of Capital Chapter 15 Quiz A...

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