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Unformatted text preview: Old Exam Questions - Cost of Capital - Solutions Page 1 of 42 Pages Cost of Capital - Solutions 1. When calculating a WACC for a company with preferred stock, there is no need to adjust the cost of the preferred stock to reflect the tax exclusion of 70% of the preferred stock dividend. * A. True B. False 2. A firm can only have one break point in its marginal cost of capital curve, which will occur when they deplete their additions to retained earnings and must switch over to new issues of equity. A. True * B. False 3. Because creditors can foresee, to at least some extent, the costs of bankruptcy, they charge a higher rate of interest to compensate for the present value of bankruptcy costs. * A. True B. False 4. Increasing a companys debt ratio will typically reduce the marginal cost of both debt and equity financing; however, it still may raise the companys WACC. A. True * B. False 5. Although quite rare, the mathematics is such that the after-tax component cost of debt financing can be greater than the after-tax component cost of equity financing. A. True * B. False 6. The cost to the firm of retained earnings is zero, since they are generated from the current earnings of the firm and there are no flotation costs associated with their retention. A. True * B. False 7. If we assume that the stock market is efficient, and if we assume that Stock A has a beta of 1.20, while Stock B has a beta of 1.40 (that is, B has higher risk than A), then we must also assume that the required rate of return on Stock B exceeds the required rate of return on Stock A. return on Stock A....
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- Spring '08
- Cost Of Capital