Question 1

Tidewater Fishing has a current beta of 1.16. The market risk premium is 6.8 percent and the risk-free rate of return is 2.9 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.18?

Accepted Answer

A)   .28 percent
B)   .14 percent
C)   .26 percent
D)   .12 percent
E)   .43 percentF) A) and B)
G) None of the above

Question 2

Sweet Treats common stock is currently priced at $36.72 a share. The company just paid $2.18 per share as its annual dividend. The dividends have been increasing by 2.2 percent annually and are expected to continue doing the same. What is the cost of equity?

Accepted Answer

A)   9.41 percent
B)   9.51 percent
C)   8.47 percent
D)   8.27 percent
E)   8.82 percentF) A) and D)
G) B) and E)

Question 3

Deep Hollow Markets has a target capital structure of 35 percent debt, 5 percent preferred stock, and 60 percent common stock. The flotation costs are 8.6 percent for common stock, 6.2 percent for preferred stock, and 3.8 percent for debt. The corporate tax rate is 21 percent. What is the weighted average flotation cost?

Accepted Answer

A)   7.17 percent
B)   6.48 percent
C)   6.62 percent
D)   6.80 percent
E)   7.11 percentF) A) and C)
G) A) and E)

Question 4

The weighted average cost of capital for a company is least dependent upon the:

Accepted Answer

A)   company's beta.
B)   coupon rate of the company's outstanding bonds.
C)   growth rate of the company's dividends.
D)   company's marginal tax rate.
E)   standard deviation of the company's common stock.F) A) and E)
G) A) and C)

Question 5

The Road Stop is a national hotel chain with a cost of capital of 12.4 percent. This chain is considering opening a high-end resort that is expected to have a cost of capital that is at least 13 percent. The estimated net present value of the resort project is $500 when discounted at 12.4 percent. The best representation of this situation is that the resort project should:

Accepted Answer

A)   be accepted immediately.
B)   be financed solely with debt in order for the project to have a positive NPV.
C)   probably be put on hold until its cost of capital can be lowered.
D)   be permanently rejected.
E)   probably be expanded.F) B) and C)
G) C) and E)

Question 6

A company's weighted average cost of capital:

Accepted Answer

A)   is equivalent to the aftertax cost of the outstanding liabilities.
B)   should be used as the required return when analyzing any new project.
C)   is the return investors require on the total assets of the firm.
D)   remains constant when the debt-equity ratio changes.
E)   is unaffected by changes in corporate tax rates.F) None of the above
G) A) and D)

Question 7

Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 65 percent of the company's overall sales. Division A is also the riskier of the two divisions. When management is deciding which of the various divisional projects should be accepted, the managers should:

Accepted Answer

A)   allocate more funds to Division A since it is the larger of the two divisions.
B)   fund all of Division B's projects first since they tend to be less risky and then allocate the remaining funds to the Division A projects that have the highest net present values.
C)   allocate the company's funds to the projects with the highest net present values based on the company's weighted average cost of capital.
D)   assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.
E)   fund the highest net present value projects from each division based on an allocation of 65 percent of the funds to Division A and 35 percent of the funds to Division B.F) C) and D)
G) A) and E)

Question 8

The Daily Brew has a debt-equity ratio of .57. The firm is analyzing a new project that requires an initial cash outlay of $260,000 for equipment. The flotation cost is 9.1 percent for equity and 4.4 percent for debt. What is the initial cost of the project including the flotation costs?

Accepted Answer

A)   $302,400
B)   $318,924
C)   $280,758
D)   $256,700
E)   $333,333F) B) and E)
G) All of the above

Question 9

Flotation costs for a levered firm should be:

Accepted Answer

A)   ignored when analyzing a project because they are a sunk cost.
B)   spread over the life of a project thereby reducing the cash flows for each year of the project.
C)   considered only when two projects are mutually exclusive.
D)   weighted and included in the initial cash flow.
E)   totally ignored when internal equity funding is utilized.F) None of the above
G) C) and D)

Question 10

River Walk Tours is expected to have an EBIT of $184,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $11,000, $1,500, and $13,000, respectively. All are expected to grow at 6 percent per year for three years. After Year 4, the adjusted cash flow from assets is expected to grow at 2.5 percent indefinitely. The company's WACC is 9.2 percent and the tax rate is 21 percent. What is the terminal value of the company's cash flows?

Accepted Answer

A)   $2,740,563
B)   $2,584,798
C)   $1,711,052
D)   $2,008,051
E)   $2,123,008F) B) and C)
G) None of the above

Question 11

Deep Mining and Precious Metals are separate firms that are both considering a silver mining project. Deep Mining is in the actual mining business and has an aftertax cost of capital of 16.2 percent. Precious Metals is in the precious gem retail business and has an aftertax cost of capital of 13.4 percent. The project under consideration has initial costs of $950,000 and anticipated annual cash inflows of $165,000 a year for 12 years. Which firm(s) , if either, should accept this project?

Accepted Answer

A)   Deep Mining only
B)   Precious Metals only
C)   Both Deep Mining and Precious Metals
D)   Neither Deep Mining nor Precious Metals
E)   Cannot be determined without further informationF) C) and D)
G) D) and E)

Question 12

Simple Foods has a zero coupon bond issue outstanding that matures in 14 years. The bonds are selling at 56 percent of par value. What is the company's aftertax cost of debt if the combined tax rate is 23 percent? (Use semiannual compounding.)

Accepted Answer

A)   4.48 percent
B)   3.13 percent
C)   3.22 percent
D)   3.73 percent
E)   2.88 percentF) B) and E)
G) A) and B)

Question 13

Grill Works has 6 percent preferred stock outstanding that is currently selling for $49 a share. The market rate of return is 14 percent and the tax rate is 21 percent. What is the cost of preferred stock if its stated value is $100 per share?

Accepted Answer

A)   12.77 percent
B)   12.29 percent
C)   12.67 percent
D)   12.24 percent
E)   12.54 percentF) All of the above
G) C) and D)

Question 14

Central Systems desires a weighted average cost of capital of 12.7 percent. The firm has an aftertax cost of debt of 4.8 percent and a cost of equity of 15.4 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?

Accepted Answer

A)   .37
B)   .42
C)   .56
D)   .34
E)   .44F) B) and E)
G) B) and D)

Question 15

Jay's Bakery has a bond issue outstanding that matures in eight years. The bonds pay interest semiannually. Currently, the bonds are quoted at 97.8 percent of face value and carry a coupon rate of 5.7 percent. What is the aftertax cost of debt if the tax rate is 21 percent?

Accepted Answer

A)   4.88 percent
B)   4.16 percent
C)   5.87 percent
D)   4.78 percent
E)   6.05 percent F) B) and C)
G) B) and E)

Question 16

The cost of capital for a new project:

Accepted Answer

A)   is determined by the overall risk level of the firm.
B)   is dependent upon the source of the funds obtained to fund that project.
C)   is dependent upon the firm's overall capital structure.
D)   should be applied as the discount rate for all other projects considered by the firm.
E)   depends upon how the funds raised for that project are going to be spent.F) A) and B)
G) B) and E)

Question 17

Dee's Fashions has a growth rate of 3.2 percent and is equally as risky as the market while its stock is currently selling for $32 a share. The overall stock market has a return of 10.9 percent and a risk premium of 6.8 percent. What is the expected rate of return on this stock?

Accepted Answer

A)   10.0 percent
B)   9.2 percent
C)   10.9 percent
D)   11.3 percent
E)   11.7 percentF) B) and C)
G) C) and D)

Question 18

Stock in Country Road Industries has a beta of 1.62. The market risk premium is 8.2 percent while T-bills are currently yielding 2.9 percent. Country Road's last paid annual dividend was $1.87 per share and dividends are expected to grow at an annual rate of 3.8 percent indefinitely. The stock sells for $25 a share. What is the estimated cost of equity using the average return of the CAPM and the dividend discount model?

Accepted Answer

A)   13.87 percent
B)   14.06 percent
C)   14.23 percent
D)   13.38 percent
E)   14.50 percentF) A) and D)
G) None of the above

Question 19

Incorporating flotation costs into the analysis of a project will:

Accepted Answer

A)   cause the project to be improperly evaluated.
B)   increase the net present value of the project.
C)   increase the project's rate of return.
D)   increase the initial cash outflow of the project.
E)   have no effect on the present value of the project.F) D) and E)
G) A) and E)

Question 20

The Dry Well has 6.85 percent preferred stock outstanding with a market value per share of $79, a stated value of $100 per share,  and a book value per share of $29. What is the cost of preferred stock?

Accepted Answer

A)   8.50 percent
B)   8.88 percent
C)   8.67 percent
D)   9.29 percent
E)   9.00 percentF) None of the above
G) A) and C)

Exam 14: Cost of Capital

Simple Foods has a zero coupon bond issue outstanding that matures in 14 years. The bonds are selling at 56 percent of par value. What is the company's aftertax cost of debt if the combined tax rate is 23 percent? (Use semiannual compounding.)

Correct Answer
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The weighted average cost of capital for a company is least dependent upon the:

Correct Answer
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Dee's Fashions has a growth rate of 3.2 percent and is equally as risky as the market while its stock is currently selling for $32 a share. The overall stock market has a return of 10.9 percent and a risk premium of 6.8 percent. What is the expected rate of return on this stock?

Correct Answer
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Sweet Treats common stock is currently priced at $36.72 a share. The company just paid $2.18 per share as its annual dividend. The dividends have been increasing by 2.2 percent annually and are expected to continue doing the same. What is the cost of equity?

Correct Answer
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The cost of capital for a new project:

Correct Answer
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Jay's Bakery has a bond issue outstanding that matures in eight years. The bonds pay interest semiannually. Currently, the bonds are quoted at 97.8 percent of face value and carry a coupon rate of 5.7 percent. What is the aftertax cost of debt if the tax rate is 21 percent?

Correct Answer
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Central Systems desires a weighted average cost of capital of 12.7 percent. The firm has an aftertax cost of debt of 4.8 percent and a cost of equity of 15.4 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?

Correct Answer
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Flotation costs for a levered firm should be:

Correct Answer
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Grill Works has 6 percent preferred stock outstanding that is currently selling for $49 a share. The market rate of return is 14 percent and the tax rate is 21 percent. What is the cost of preferred stock if its stated value is $100 per share?

Correct Answer
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A company's weighted average cost of capital:

Correct Answer
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The Daily Brew has a debt-equity ratio of .57. The firm is analyzing a new project that requires an initial cash outlay of $260,000 for equipment. The flotation cost is 9.1 percent for equity and 4.4 percent for debt. What is the initial cost of the project including the flotation costs?

Correct Answer
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Tidewater Fishing has a current beta of 1.16. The market risk premium is 6.8 percent and the risk-free rate of return is 2.9 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.18?

Correct Answer
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Incorporating flotation costs into the analysis of a project will:

Correct Answer
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The Dry Well has 6.85 percent preferred stock outstanding with a market value per share of $79, a stated value of $100 per share, and a book value per share of $29. What is the cost of preferred stock?

Correct Answer
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Exam 14: Cost of Capital

Simple Foods has a zero coupon bond issue outstanding that matures in 14 years. The bonds are selling at 56 percent of par value. What is the company's aftertax cost of debt if the combined tax rate is 23 percent? (Use semiannual compounding.)

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The weighted average cost of capital for a company is least dependent upon the:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Dee's Fashions has a growth rate of 3.2 percent and is equally as risky as the market while its stock is currently selling for $32 a share. The overall stock market has a return of 10.9 percent and a risk premium of 6.8 percent. What is the expected rate of return on this stock?

Correct AnswerverifiedShow Answer

Sweet Treats common stock is currently priced at $36.72 a share. The company just paid $2.18 per share as its annual dividend. The dividends have been increasing by 2.2 percent annually and are expected to continue doing the same. What is the cost of equity?

Correct AnswerverifiedShow Answer

The cost of capital for a new project:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Jay's Bakery has a bond issue outstanding that matures in eight years. The bonds pay interest semiannually. Currently, the bonds are quoted at 97.8 percent of face value and carry a coupon rate of 5.7 percent. What is the aftertax cost of debt if the tax rate is 21 percent?

Correct AnswerverifiedShow Answer

Central Systems desires a weighted average cost of capital of 12.7 percent. The firm has an aftertax cost of debt of 4.8 percent and a cost of equity of 15.4 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?

Correct AnswerverifiedShow Answer

Flotation costs for a levered firm should be:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Grill Works has 6 percent preferred stock outstanding that is currently selling for $49 a share. The market rate of return is 14 percent and the tax rate is 21 percent. What is the cost of preferred stock if its stated value is $100 per share?

Correct AnswerverifiedShow Answer

A company's weighted average cost of capital:

Correct AnswerverifiedShow Answer

The Daily Brew has a debt-equity ratio of .57. The firm is analyzing a new project that requires an initial cash outlay of $260,000 for equipment. The flotation cost is 9.1 percent for equity and 4.4 percent for debt. What is the initial cost of the project including the flotation costs?

Correct AnswerverifiedShow Answer

Tidewater Fishing has a current beta of 1.16. The market risk premium is 6.8 percent and the risk-free rate of return is 2.9 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.18?

Correct AnswerverifiedShow Answer

Incorporating flotation costs into the analysis of a project will:

Correct AnswerverifiedShow Answer

The Dry Well has 6.85 percent preferred stock outstanding with a market value per share of $79, a stated value of $100 per share, and a book value per share of $29. What is the cost of preferred stock?

Correct AnswerverifiedShow Answer

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