Chapter 09 MC - CHAPTER NINE Multiple Choice Questions 9-1....

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CHAPTER NINE Multiple Choice Questions 9-1. Cost of capital can best be defined as: a. compensation demanded by the investor of a firm before taxes and transaction costs b. compensation demanded by the investor of a firm after taxes and transaction costs c. compensation demanded by the investor of a firm before taxes only d. compensation demanded by the investor of a firm before taxes, transaction costs, and interest expense 9-2. The component cost of capital is best described as: a. cost of capital issued by a creditor b. cost of capital demanded by the stockholder c. cost of capital provided by a given creditor or stockholder d. determined by interest charged 9-3. All else equal, a firm with low levels of debt may prefer debt financing because: a. before tax income is higher b. leverage risk is lower c. net income is higher d. of tax advantages 9-4. After tax cost of debt can best be described as: a. AT k d = k d (l-T) b. AT k d = k d (l+T) c. AT k d = (1-k d ) d. AT k d = k d (T-1) 9-5. The after tax cost of debt on a 9% $200,000 loan given a 30% tax bracket would be: a. 9% b. 6.3% c. 5% d. 4% 102
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The after tax cost of debt on a 6% $50,000 loan given a 35% tax bracket would be: a. 3.9% b. 0.039% c. 6% d. 4% 9-7. The cost of preferred stock can best be described as: a. k p = D p /(P p -f) b. k p = P p /D p c. P p = k p /D p d. D p = k p /P p 9-8. If the dividends paid on a preferred stock issue are $5 per share and the price of the stock after subtracting flotation costs is $25, calculate cost of preferred stock. a. 20% b. .2% c. 5% d. 6% 9-9. If the dividends paid on a preferred stock issue are $3 per share and the cost of preferred stock is 12%, calculate the price of the stock. Assume there are no flotation costs. a. $12 b. $20 c. $36 d. $25 9-10. The cost of retained earnings is: a. the cost of paying dividends b. k RE = P cs /D 1 c. rate of return necessary to justify not making dividend payments d. there is no cost of retained earnings; they are residual earnings of the firm 9-11. The cost of common stock equity can best be described as: a. P o = D 1 /(k s + g) b. k s = (D 1 /P o ) + g c. P o = D 1 /(k s - g) d. k s = (D 1 /P o ) - g 9-12. If the dividends paid on a common stock issue are $3.50 per share, the price of the stock is $50, and the growth rate is 6%, calculate cost of common stock. 103
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Chapter 09 MC - CHAPTER NINE Multiple Choice Questions 9-1....

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