Quiz
Cost of Capital
Questions in this quiz (43)
1The cost of capital is the rate of return a firm must earn on investments in order to leave share price unchanged.
- ATrue
- BFalse
2If risk is unchanged, the undertaking of projects with a rate of return above the cost of capital will decrease the value of the firm.
- ATrue
- BFalse
3The specific cost of each source of financing is viewed on a before tax basis.
- ATrue
- BFalse
4The net proceeds used in calculation of the cost of long-term debt are funds actually received from the sale after paying flotation costs.
- ATrue
- BFalse
5When the net proceeds from the sale of a bond equal its par value, the coupon interest rate will be the bond's before tax cost of capital.
- ATrue
- BFalse
6The cost of preferred stock is typically lower than the cost of long-term debt because dividends paid on preferred stock are tax deductible.
- ATrue
- BFalse
7The cost of common stock equity may be measured using either zero growth valuation model or the CAPM.
- ATrue
- BFalse
8The cost of retained earnings is always lower than the cost of a new issue of common stock due to the absence of flotation costs.
- ATrue
- BFalse
9The CAPM describes the relationship between the required return and the non systematic risk of the firm as measured by the beta coefficient.
- ATrue
- BFalse
10Larger volumes of new financing are associated with greater risk and lead to higher financial costs.
- ATrue
- BFalse
11Since preferred stock is a form of ownership, the stock will never mature.
- ATrue
- BFalse
12The weighted marginal cost of capital is the firm's weighted average cost of capital associated with its next dollar of total financing.
- ATrue
- BFalse
13A firm's investment opportunities schedule is a ranking of investment possibilities for worse (lowest return) to best (highest return).
- ATrue
- BFalse
14As cumulative amount of money invested in a firm's capital project increases, its returns on the projects will increase.
- ATrue
- BFalse
15According to the firm's owner wealth maximization goal, the firm should accept projects up to the point where the marginal return on its investment equals its weighted marginal cost of capital.
- ATrue
- BFalse
16The component cost of capital are market-determined variables in as much as they are based on investor's required returns.
- ATrue
- BFalse
17The cost of issuing preferred stock by a corporation must be adjusted to an after-tax figure because of the 70% dividend exclusion provision for corporations holding other corporations' preferred stock.
- ATrue
- BFalse
18The weighted average cost of capital increases if the total funds required call for an amount of equity in excess of what can be obtained as retained earnings.
- ATrue
- BFalse
19In capital budgeting and cost of capital analyses, the firm should always consider retained earnings as the first source of capital, since this is a free source of funding to the firm.
- ATrue
- BFalse
20The cost of capital should reflect the average cost of the various sources of long-term funds a firm uses to support its assets.
- ATrue
- BFalse
21The _____ is the rate of return a firm must earn on its investment in order to maintain the market value of its stock.
- Agross profit margin
- Binternal rate of return
- Cnet present value
- Dcost of capital
22_____ refers to the risk of the firm being unable to cover its operation costs.
- AFinancial risk
- BTotal risk
- CBusiness risk
- DNonsystematic
23The cost of capital reflects the cost of funds _____.
- Aover the short run
- Bat current book value
- Cat historical values
- Dover the long run
24The firm's optimal mix of debt and equity is called _____.
- Atarget capital structure
- Bmaximum wealth ratio
- Coptimal mix
- Ddebt to equity ratio
25The specific cost of each source of long-term financing is based on _____ and _____ costs.
- Abefore-tax; current
- Bafter-tax; historical
- Cafter-tax; current
- Dbefore-tax; historical
26A tax adjustment must be made in determining the cost of _____.
- Acommon stock
- Blong-term debt
- Cretained earnings
- Dpreferred stock
27A firm has issued 8% preferred stock, which sold for $100 per share par value. The flotation costs of the stock equaled $3 and the firm's marginal tax rate is 40%. The cost of the preferred stock is
- A8.25%
- B7.5%
- C7.35%
- D9.85%
28The approximate before-tax cost of debt for a 20 year, 9%, $1000 par value bond selling at $950 is
- A10.63%
- B11.39%
- C7.45%
- D9.49%
29The cost of common stock equity may be estimated by using the
- AIRR
- BNPV
- CConstant growth valuation model
- DMIRR model
30The cost of retained earnings is equal t
- Athe cost of long-term debt
- Bthe cost of common stock equity
- Czero
- Dthe marginal cost of capital
31The firm has a beta of .90. The market return equals 12% and the risk free rate of return equals 4%. The estimated cost of common stock equity is _____
- A11.2%
- B9.8%
- C10.4%
- D12.6%
32One major expense associated with issuing new shares of common stock is
- Alegal fees
- Bunderwriting fees
- Cregistration fees
- Dunderpricing
33A firm has common stock with a market price of $45 per share and an expert dividend of $3 per share at the end of the coming year. The growth rate in dividends has been 4%. The cost of the firm's common stock equity is
- A9.75%
- B10.67%
- C8.42%
- D11.25%
34Generally the least expensive form of long-term capital is _____
- Ashort-term debt
- Bretained earnings
- Clong-term debt
- Dcommon stock
35A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources:
Source of capital proportion after-tax cost
long-term debt 45% 7%
preferred stock 15% 10%
common stock equity 40% 14%
the weighted average cost of capital is _____- A10.25%
- B11.45%
- C9.75%
- D8.35%
36A firm's before-tax cost of long-term debt 10.45%. what is the firm's after tax cost of long-term debt if the firm has a 40% corporate tax rate?
- A8.48%
- B6.27%
- C5.32%
- D9.75%
37In calculating the cost of common stock equity, the model having the stronger theoretical foundation is the _____.
- AGordon model
- Bvariable growth model
- Czero growth model
- DCAPM
38A firm has discovered that its retained earnings of $400,000 will soon be exhausted. What is the point at which th firm will non longer be able to sustain the retained earnings cost of 6% if the historical weight of debt in the firm's WACC is 40%.
- A$750,000
- B$160,000
- C$1,000,000
- D$100,000
39When determining the after-tax cost of a bond, the face value of the bond must be adjusted to the net proceeds amount by considering _____.
- Arisk
- Bflotation cost
- Ctaxes
- Dreturns
40When the face value of a bond equals its selling price, the firm's cost of the bond will be equal to
- Athe coupon interest rate
- Bthe firm's WACC
- Cthe risk free rate
- Dthe firm's WMCC
41Which of the following statements is most correct?
- AUnder normal conditions, the CAPM approach to estimating a firm's cost of retained earnings gives a better estimate than other approaches.
- BThe risk premium used in the bond-yield-plus-risk-premiun methods is the same as the one used in the CAPM method.
- CThe CAPM approach is typically used to estimate a firm's flotation cost adjustment factor, and this factor is added to the DCF cost estimate.
- DThe above statements are all false.
42Micro Corp's common stock is currently selling sfor $50 per share. Current dividends is $2 per share. If dividends are expected to grow 6% per year and its flotation costs are 10%, then what is the firm's cost of retained earnings and cost of new common stock?
- A10.71%; 10.24%
- B10.24%; 10.71%
- C10.24%; 11.38%
- D11.38%; 10.71%
43Project A has a cost of $200 million and a rate of return of 13%, while project B has a cost of $125 million and a rate of return of 10%. All of the company's potential projects are equally risky. Which of the following may be true concerning debt and equity?
- ACost of debt of firm A > Cost of equity of firm A
- BCost of debt of firm A > Cost of equity of firm B
- Cthe cost of internally generated equity for firm A > cost of externally generated equity funds of firm A
- Dthe cost of internally generated equity for firm A < cost of debt for firm A
Information
- Description
- Quiz on Cost of Capital, created by lseyer436 on 27/11/2015.
- Author
- lseyer436
- Language
- English
- Views
- 154
- Rating
- No ratings yet Rate this quiz