chapter 10 - CHAPTER 10 THE COST OF CAPITAL True/False...

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CHAPTER 10 THE COST OF CAPITAL True/False Easy: (10.1) Capital Answer: a EASY 1 . "Capital" is sometimes defined as the funds supplied by investors. a. True b. False (10.1) Cost of capital Answer: a EASY 2 . The cost of capital should reflect the average cost of the various sources of long-term funds a firm uses to acquire assets. a. True b. False (10.1) Component costs of capital Answer: a EASY 3 . The component costs of capital are market-determined variables in the sense that they are based on investors' required returns. a. True b. False (10.2) Cost of debt Answer: b EASY 4 . The before-tax cost of debt, which is lower than the after-tax cost, is used as the component cost of debt for purposes of developing the firm's WACC. a. True b. False (10.2) Cost of debt Answer: b EASY 5 . The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt. a. True b. False (10.3) Cost of preferred stock Answer: b EASY 6 . The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends received by a corporation may be excluded from the receiving corporation's taxable income. a. True b. False Chapter 10: Cost of Capital True/False Page 59
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(10.4) Cost of common stock Answer: a EASY 7 . The cost of common stock is the rate of return the marginal stockholder requires on the firm's common stock. a. True b. False (10.4) Cost of retained earnings Answer: b EASY 8 . For capital budgeting and cost of capital purposes, the firm should always consider retained earnings as the first source of capital, i.e., use these funds first, because retained earnings have no cost to the firm. a. True b. False (10.4) Cost of retained earnings Answer: b EASY 9 . Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them, and no flotation costs are required to raise them, but capital raised by selling new stock or bonds does have a cost. a. True b. False (10.4) Cost of retained earnings Answer: b EASY 10 . The cost of equity raised by retaining earnings can be less than, equal to, or greater than the cost of external equity raised by selling new issues of common stock, depending on tax rates, flotation costs, the attitude of investors, and other factors. a. True b. False (10.9) Cost of new common equity Answer: b EASY 11 . The firm's cost of external equity raised by issuing new stock is the same as the required rate of return on the firm's outstanding common stock. a. True b. False (10.9) Cost of new common equity Answer: b EASY 12 . The cost of external equity capital raised by issuing new common stock (r e ) is defined as follows, in words: "The cost of external equity equals the cost of equity capital from retaining earnings (r s ), divided by one minus the percentage flotation cost required to sell the new stock, (1 - F)." a. True b. False Page 60 True/False Chapter 10: Cost of Capital
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(10.9) Cost of new common equity
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This note was uploaded on 10/16/2011 for the course ECON 101 taught by Professor Smith during the Spring '10 term at Abraham Baldwin Agricultural College.

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chapter 10 - CHAPTER 10 THE COST OF CAPITAL True/False...

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