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Electronic Products has 35,000 bonds outstanding that are currently quoted at 102.3.The bonds mature in 11 years and carry a 9 percent annual coupon.What is the firm's aftertax cost of debt if the applicable tax rate is 30 percent?


A) 4.47 percent
B) 4.79 percent
C) 6.07 percent
D) 6.98 percent
E) 8.67 percent

F) B) and C)
G) C) and D)

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Which one of the following will affect the capital structure weights used to compute a firm's weighted average cost of capital?


A) Decrease in the book value of a firm's equity
B) Decrease in a firm's tax rate
C) Increase in the market value of the firm's common stock
D) Increase in the market risk premium
E) Increase in the firm's beta

F) C) and E)
G) None of the above

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Four years ago,the Morgan Co.issued 15-year,7.0 percent semiannual coupon bonds at par.Today,the bonds are quoted at 101.6.What is this firm's pretax cost of debt?


A) 6.97 percent
B) 7.08 percent
C) 6.79 percent
D) 6.83 percent
E) 7.39 percent

F) B) and E)
G) A) and C)

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Which one of the following statements is correct? Assume the pretax cost of debt is less than the cost of equity.


A) A firm may change its capital structure if the government changes its tax policies.
B) A decrease in the dividend growth rate increases the cost of equity.
C) A decrease in the systematic risk of a firm will increase the firm's cost of capital.
D) A decrease in a firm's debt-equity ratio will decrease the firm's cost of capital.
E) The cost of preferred stock decreases when the tax rate increases.

F) B) and C)
G) A) and E)

Correct Answer

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Bob's is a retail chain of specialty hardware stores.The firm has 21,000 shares of stock outstanding that are currently valued at $68 a share and provide a 13.2 percent rate of return.The firm also has 500 bonds outstanding that have a face value of $1,000,a market price of $1,068,and a 7 percent coupon.These bonds mature in 6 years and pay interest semiannually.The tax rate is 35 percent.The firm is considering expanding by building a new superstore.The superstore will require an initial investment of $12.3 million and is expected to produce cash inflows of $1.1 million annually over its 10-year life.The risks associated with the superstore are comparable to the risks of the firm's current operations.The initial investment will be depreciated on a straight line basis over the life of the project.At the end of the 10 years,the firm expects to sell the superstore for $6.7 million.Should the firm accept or reject the superstore project and why?


A) Accept; the project's NPV is $1.27 million.
B) Accept; the NPV is $4.89 million.
C) Reject; the NPV is $1.06 million.
D) Reject; the NPV -$3.27 million.
E) Reject; the NPV is -$5.71 million.

F) A) and C)
G) A) and B)

Correct Answer

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All else constant,an increase in a firm's cost of debt:


A) could be caused by an increase in the firm's tax rate.
B) will result in an increase in the firm's cost of capital.
C) will lower the firm's weighted average cost of capital.
D) will lower the firm's cost of equity.
E) will increase the firm's capital structure weight of debt.

F) B) and D)
G) A) and E)

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Design Interiors has a cost of equity of 18.6 percent and a pretax cost of debt of 9.7 percent.The firm's target weighted average cost of capital is 12 percent and its tax rate is 35 percent.What is the firm's target debt-equity ratio?


A) 0.81
B) 0.87
C) 0.98
D) 1.02
E) 1.16

F) C) and D)
G) D) and E)

Correct Answer

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The weighted average cost of capital is defined as the weighted average of a firm's:


A) return on its investments.
B) cost of equity and its aftertax cost of debt.
C) pretax cost of debt and equity securities.
D) bond coupon rates.
E) dividend and capital gains yields.

F) A) and B)
G) A) and E)

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Tennessee Valley Antiques would like to issue new equity shares if its cost of equity declines to 10.5 percent.The company pays a constant annual dividend of $1.80 per share.What does the market price of the stock need to be for the firm to issue the new shares?


A) $14.48
B) $14.83
C) $17.14
D) $17.92
E) $18.80

F) A) and E)
G) D) and E)

Correct Answer

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Which one of the following statements is correct related to the dividend growth model approach to computing the cost of equity?


A) The rate of growth must exceed the required rate of return.
B) The rate of return must be adjusted for taxes.
C) The annual dividend used in the computation must be for year 1 if you are using today's stock price to compute the return.
D) The cost of equity is equal to the return on the stock plus the risk-free rate.
E) The cost of equity is equal to the return on the stock multiplied by the stock's beta.

F) A) and D)
G) B) and C)

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Aaron's Rentals has 58,000 shares of common stock outstanding at a market price of $36 a share.The common stock just paid a $1.64 annual dividend and has a dividend growth rate of 2.8 percent.There are 12,000 shares of 6 percent preferred stock outstanding at a market price of $51 a share.The preferred stock has a par value of $100.The outstanding bonds mature in 17 years,have a total face value of $750,000,a face value per bond of $1,000,and a market price of $1,011 each.The bonds pay 8 percent interest,semiannually.The tax rate is 34 percent.What is the firm's weighted average cost of capital?


A) 7.74 percent
B) 8.68 percent
C) 9.29 percent
D) 9.97 percent
E) 10.30 percent

F) None of the above
G) C) and D)

Correct Answer

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All else constant,which of the following will increase the aftertax cost of debt for a firm? I.Increase in the yield to maturity of the firm's outstanding debt II.Decrease in the yield to maturity of the firm's outstanding debt III.Increase in the firm's tax rate IV.Decrease in the firm's tax rate


A) I only
B) I and III only
C) I and IV only
D) II and III only
E) II and IV only

F) A) and D)
G) B) and C)

Correct Answer

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The common stock of Contemporary Interiors has a beta of 1.65 and a standard deviation of 27.4 percent.The market rate of return is 13.2 percent and the risk-free rate is 4.8 percent.What is the cost of equity for this firm?


A) 18.66 percent
B) 18.76 percent
C) 21.08 percent
D) 24.40 percent
E) 26.05 percent

F) B) and E)
G) A) and B)

Correct Answer

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Black Stone Furnaces wants to build a new facility.The cost of capital for this investment is primarily dependent on which one of the following?


A) Firm's overall source of funds
B) Source of the funds used to build the facility
C) Current tax rate
D) The nature of the investment
E) Firm's historical average rate of return

F) B) and C)
G) D) and E)

Correct Answer

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Given the following information for Electric Transport,find the WACC.Assume the company's tax rate is 34 percent. Debt: 7,500,8.4 percent coupon bonds outstanding.$1,000 par value,22 years to maturity,selling for 103 percent of par,the bonds make semiannual payments. Common stock: 195,000 shares outstanding,selling for $78 per share,beta is 1.21. Preferred stock: 11,000 shares of 6.35 percent preferred stock outstanding,currently selling for $76 per share. Market: 8 percent market risk premium and 5.1 percent risk-free rate.


A) 11.49 percent
B) 12.07 percent
C) 12.42 percent
D) 13.33 percent
E) 13.80 percent

F) A) and B)
G) A) and E)

Correct Answer

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Which of the following features are advantages of the dividend growth model? I.Easy to understand II.Model simplicity III.Constant dividend growth rate IV.Model's applicability to all common stocks


A) II only
B) I and III only
C) II and IV only
D) I and II only
E) I, II, and III only

F) All of the above
G) A) and C)

Correct Answer

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Which one of the following statements is accurate for a levered firm?


A) WACC should be used as the required return for all proposed investments.
B) A firm's WACC will decrease whenever the firm's tax rate decreases.
C) An increase in the market risk premium will decrease a firm's WACC.
D) The subjective approach totally ignores a firm's own WACC.
E) A reduction in the risk level of a firm will tend to decrease the firm's WACC.

F) A) and B)
G) A) and C)

Correct Answer

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The Green Balloon just paid its first annual dividend of $0.12 a share.The firm plans to increase the dividend by 3.5 percent per year indefinitely.What is the firm's cost of equity if the current stock price is $6.50 a share?


A) 5.35 percent
B) 5.41 percent
C) 14.42 percent
D) 18.79 percent
E) 19.98 percent

F) A) and B)
G) D) and E)

Correct Answer

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