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Question 105 question 105 l1cf tbp118 1504 los los

  • Harvard University
  • SEP 2021
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Question 105Question 105L1CF-TBP118-1504LOS: LOS-3620Lesson Reference: Lesson 3: Topics in Cost of Capital EstimationDifficulty: mediumMassie Corporation has a stable operating history since its inception 10 years ago. It trades on all majorstock markets. During the past three years, Massie has made several acquisitions financed by newly issuedbonds. Based solely on the given information, which estimation period isbestsuited to estimate beta forMassie?3 years.7 years.10 years.RationaleRationaleThis Answer is CorrectLonger estimation periods are generally appropriate for companies with stable operating histories.Massie's financial leverage, however, has likely changed significantly due to the recent acquisitions; ashorter period will better reflect the company-specific changes that have occurred over the past threeyears.
Question 106Question 106L1CFR36-LIC002-1510LOS: LOS-3600Lesson Reference: Lesson 2: Costs of the Different Sources of CapitalDifficulty: mediumABC Corp. issued nonconvertible, noncallable preferred stock last year at an issue price of $100; it pays adividend of $5 per annum. The stock is now trading at $110. The company's marginal tax rate is 40%. Therequired return on ABC Corp preferred stock isclosestto:2.7%.3.0%.4.5%.RationaleRationaleThis Answer is CorrectThe capital cost of preferred stock is the dividend divided by the price. There is no adjustment for tax,since a preferred dividend is not a tax-deductible expense. The cost is $5 / $110 = 4.5%.
Question 107Question 107L1CF-PQ3624-1410LOS: LOS-3580Lesson Reference: Lesson 2: Costs of the Different Sources of CapitalDifficulty: mediumWhich of the following statements regarding a stock’s beta isleast accurate?It is believed to revert toward 1 over time.It is calculated by regressing market returns against the company’s stock returns over a givenperiod.Some experts argue that the betas of small companies should be adjusted upward to reflectgreater risk.RationaleRationaleThis Answer is CorrectBeta is calculated by regressing the company’s stock returns against market returns over a givenperiod, rather than the reverse. In other words, the company’s stock beta is the dependent variable (y)in the regression because it depends on the value of market beta.
Question 108Question 108L1R36TB-AC006-1605LOS: LOS-3600Lesson Reference: Lesson 2: Costs of the Different Sources of CapitalDifficulty: mediumA company issued fixed-rate perpetual preferred stock two years ago. The shares were issued at a price of$50 and they currently trade at a price of $62 per share. If the company were to issue preferred stock today,the yield would have to be 7.0 percent. The dividend on the previously issued preferred shares isclosest to:$3.50$3.92$4.34RationaleRationale$3.50We are given the current price per share and the current required yield and are asked to find thedividend. We can use the formula for finding the cost of preferred stock and solve for the missing item—the dividend:RationaleRationale$3.92We are given the current price per share and the current required yield and are asked to find thedividend. We can use the formula for finding the cost of preferred stock and solve for the missing item—the dividend:RationaleRationale$4.34We are given the current price per share and the current required yield and are asked to find thedividend. We can use the formula for finding the cost of preferred stock and solve for the missing item—the dividend:

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