Cost of Capital 2 - r s than on the interest rate on...

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Old Exam Questions - Cost of Capital Page 2 of 27 Pages A. True B. False 8. If a firm must pay flotation expense when issuing a security, then the firm’s required rate of return on that security will be greater than the investor’s required rate of return for that security. A. True B. False 9. The easiest way to correctly calculate the firm’s cost of debt is simply to multiply the coupon rate on the debt times one minus the firm’s tax rate. A. True B. False 10. The cost of equity capital from the sale of new common stock (r e ) is generally equal to the cost of equity capital from retention of earnings (r s ), divided by one minus the flotation cost as a percentage of sales price (1 - F). A. True B. False 11. If expectations for long-term inflation rose, but the slope of the SML remained constant, this, for most firms, would have a greater impact on the required rate of return on equity,
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Unformatted text preview: r s , than on the interest rate on long-term debt, r d . In other words, the percentage point increase in the cost of equity would be greater than the increase in the interest rate on long-term debt. (Hint: play with some numbers and see what happens.) A. True B. False 12. If the tax laws stated that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, it would probably encourage companies to use more debt financing than they presently do, other things held constant. A. True B. False 1. Which of the following statements is not (or least) correct? A. Because of the tax shelter created by issuing preferred stock dividends (remember that 70 percent of dividends are excluded from taxes), the firm’s after-tax cost of preferred stock may be significantly less than its before-tax...
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