TEST INFO Chapter 9 Cost of Capital

TEST INFO Chapter 9 Cost of Capital - CHAPTER 9 THE COST OF...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard) Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines. Multiple Choice: True/False (10-1) Capital F I Answer: a EASY 1 . "Capital" is sometimes defined as funds supplied to a firm by investors. a. True b. False (10-1) Cost of capital F I Answer: a EASY 2 . The cost of capital used in capital budgeting 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) Specific capital cost F I Answer: b EASY 3 . Suppose you are the president of a small, publicly-traded corporation. Since you believe that your firm's stock price is temporarily depressed, all additional capital funds required during the current year will be raised using debt. In this case, the appropriate marginal cost of capital for use in capital budgeting during the current year is the after-tax cost of debt. a. True b. False (10-2) Component capital costs F I Answer: a EASY 4 . The component costs of capital are market-determined variables in the sense that they are based on investors' required returns. a. True b. False (10-3) Cost of debt F I Answer: b EASY 5 . 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. Chapter 10: Cost of Capital True/False Page 141 CHAPTER 9 THE COST OF CAPITAL
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
a. True b. False Page 142 True/False Chapter 10: Cost of Capital
Background image of page 2
(10-3) Cost of debt F I Answer: b EASY 6 . 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 debt F I Answer: a EASY 7 . The cost of debt is equal to one minus the marginal tax rate multiplied by the interest rate on new debt. a. True b. False (10-4) Cost of preferred F I Answer: b EASY 8 . 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 (10-4) Cost of preferred F I Answer: a EASY 9 . The cost of perpetual preferred stock is found as the preferred's annual dividend divided by the market price of the preferred stock. No adjustment is needed for taxes because preferred dividends, unlike interest on debt, is not deductable by the issuing firm. a. True b. False (10-5) Cost of common F I Answer: a EASY 10 . The cost of common equity obtained by retaining earnings is the rate of return the marginal stockholder requires on the firm's common stock. a. True b. False (10-5) Cost of retained earnings F I Answer: b EASY 11 . 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
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/11/2011 for the course FIN 534 taught by Professor Nalla during the Spring '08 term at Strayer.

Page1 / 45

TEST INFO Chapter 9 Cost of Capital - CHAPTER 9 THE COST OF...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online