1012 Risk treatment Answer e Diff M 43 Which of the following methods of

# 1012 risk treatment answer e diff m 43 which of the

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(10.12) Risk treatment Answer: e Diff: M 43 . Which of the following methods of estimating the cost of common equity for a firm treats risk explicitly? a. DCF method. b. CAPM method. c. Composite method. d. Bond-yield-plus-risk-premium method. e. Answers b and d are correct. Page 10 Chapter 10: Determining the Cost of Capital -
(10.14) WACC concepts Answer: e Diff: M 44 . Which of the following statements is most correct? a. Since stockholders do not generally pay corporate taxes, corpora- tions should focus on before-tax cash flows when calculating the weighted average cost of capital (WACC). b. When calculating the weighted average cost of capital, firms should include the cost of accounts payable. c. When calculating the weighted average cost of capital, firms should rely on historical costs rather than marginal costs of capital. d. Answers a and b are correct. e. None of the answers above is correct. Multiple Choice: Problems Easy: (10.6) Cost of common stock Answer: d Diff: E 45 . Bouchard Company's stock sells for \$20 per share, its last dividend (D 0 ) was \$1.00, and its growth rate is a constant 6 percent. What is its cost of common stock, r s ? a. 5.0% b. 5.3% c. 11.0% d. 11.3% e. 11.6% (10.6) Cost of common stock Answer: b Diff: E 46 . Your company's stock sells for \$50 per share, its last dividend (D 0 ) was \$2.00, and its growth rate is a constant 5 percent. What is the cost of common stock, r s ? a. 9.0% b. 9.2% c. 9.6% d. 9.8% e. 10.0% (10.6) Cost of common stock Answer: e Diff: E 47 . The Global Advertising Company has a marginal tax rate of 40 percent. The last dividend paid by Global was \$0.90. Global's common stock is selling for \$8.59 per share, and its expected growth rate in earnings and dividends is 5 percent. What is Global's cost of common stock? a. 12.22% b. 17.22% c. 10.33% d. 9.66% e. 16.00% Chapter 10: Determining the Cost of Capital Page 11
(10.9) WACC with Flotation Costs Answer: a Diff: E 48 . An analyst has collected the following information regarding Christo- pher Co.: The company’s capital structure is 70 percent equity, 30 percent debt. The yield to maturity on the company’s bonds is 9 percent. The company’s year-end dividend is forecasted to be \$0.80 a share. The company expects that its dividend will grow at a constant rate of 9 percent a year. The company’s stock price is \$25. The company’s tax rate is 40 percent. The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flota- tion cost will equal 10 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capi- tal. Given this information, calculate the company’s WACC. a. 10.41% b. 12.56% c. 10.78% d. 13.55% e. 9.29% Medium: (10.5) Cost of common stock Answer: d Diff: M 49 . The common stock of Anthony Steel has a beta of 1.20. The risk-free rate is 5 percent and the market risk premium (r M - r RF ) is 6 percent. What is the company’s cost of common stock, r s ? a. 7.0% b. 7.2% c. 11.0% d. 12.2% e. 12.4% (10.6) Cost of common stock Answer: b Diff: M 50 . Martin Corporation's common stock is currently selling for \$50 per share. The current dividend is \$2.00 per share. If dividends are ex- pected to grow at 6 percent per year, then what is the firm's cost of common stock?

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