Finance test 3 (Chapter 9)

The ________ is the rate of return that a firm must earn on its investments in order to maintain the market value of its stock.A) yield to maturityB) cost of capitalC) internal rate of returnD) modified internal rate of return B) Cost of capital
The ________ is the rate of return required by the market suppliers of capital in order to attract their funds to the firm.A) yield to maturityB) internal rate of returnC) cost of capitalD) modified internal rate of return C) Cost of Capital
The cost of capital reflects the cost of funds ________.A) that makes the net present value of a project equal zeroB) at a given point in timeC) over a long-run time periodD) at current book values C) Over a long-run time period
Although a firm’s existing mix of financing sources may reflect its target capital structure, it is ultimately ________.A) the internal rate of return that is relevant for evaluating the firm’s future investment opportunitiesB) the marginal cost of capital that is relevant for evaluating the firm’s future investment opportunitiesC) the risk-free rate of return that is relevant for evaluating the firm’s future investment opportunitiesD) the risk-free rate of return that is relevant for evaluating the firm’s future financing opportunities B) the marginal cost of capital that is relevant for evaluating the firm’s future investment opportunities
The ________ is a weighted average of the cost of funds which reflects the interrelationship of financing decisions.A) internal rate of returnB) sunk costC) cost of capitalD) risk-free rate C) Cost of capital
The ________ is the firm’s desired optimal mix of debt and equity financing.A) book valueB) market valueC) cost of capitalD) target capital structure D) Target capital structure
The cost to a firm of each type of capital is dependent upon ________.A) the risk-free rate of bonds plus the business risk of the firmB) the risk-free rate of each type of capital plus the business risk of the firmC) the risk-free rate of each type of capital plus the financial risk of the firmD) the risk-free rate of each type of capital plus the business risk and the financial risk of the firm D) the risk-free rate of each type of capital plus the business risk and the financial risk of the firm
In order to recognize the interrelationship between financing and investments, a firm should use ________ when evaluating an investment.A) the least costly source of financingB) the most costly source of financingC) the weighted average cost of all financing sourcesD) the current opportunity cost C) The weighted average cost of all financing sources
The four basic sources of long-term funds for a firm are ________.A) current liabilities, long-term debt, common stock, and preferred stockB) current liabilities, long-term debt, common stock, and retained earningsC) long-term debt, paid-in capital in excess of par, common stock, and retained earningsD) long-term debt, common stock, preferred stock, and retained earnings D) long-term debt, common stock, preferred stock, and retained earnings
Which of the following is true of long-term funds?A) They provide an easy way to reduce financing costs because they are relatively cheaper than short-term funds.B) They are a type of investment fund which invests in money market investments of high quality and low risk.C) They are the sources that supply the financing necessary to support a firm’s capital budgeting activities.D) They are the funds available to a business on the basis of inventory held and require detailed inventory tracking. C) They are the sources that supply the financing necessary to support a firm’s capital budgeting activities.
Which of the following is a source of long-term funds?A) commercial paperB) retained earningsC) factoringD) money market instruments B) Retained earnings
Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is ________.A) new common stock, retained earnings, preferred stock, long-term debtB) common stock, preferred stock, long-term debt, short-term debtC) preferred stock, new common stocks, common stock, retained earningsD) long-term debt, preferred stock, retained earnings, new common stock D) long-term debt, preferred stock, retained earnings, new common stock
Generally the least expensive source of long-term capital is ________.A) retained earningsB) preferred stockC) long-term debtD) common stock C) Long-term debt
A tax adjustment must be made in determining the cost of ________.A) long-term debtB) common stockC) preferred stockD) retained earnings A) Long-term debt
The ________ from the sale of a security are the funds actually received from the sale after ________.A) gross proceeds; adding the after-tax costsB) gross proceeds; reducing the flotation costsC) net proceeds; reducing the flotation costsD) net proceeds; adding the after-tax costs C) net proceeds; reducing the flotation costs
The approximate before-tax cost of debt for a 15-year, 10 percent, $1,000 par value bond selling at $950 is ________.A) 10 percentB) 10.7 percentC) 12 percentD) 15.4 percent B) 10.7 percent
The approximate before-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is ________.A) 5.97 percentB) 8.33 percentC) 8.82 percentD) 9 percent A) 5.97 percent
The before-tax cost of debt for a firm, which has a marginal tax rate of 40 percent, is 12 percent. The after-tax cost of debt is ________.A) 4.8 percentB) 6.0 percentC) 7.2 percentD) 12 percent C) 7.2 percent
The specific cost of each source of long-term financing is based on ________ and ________ costs.A) before-tax; historicalB) after-tax; historicalC) before-tax; book valueD) after-tax; current D) after-tax; current
When determining the after-tax cost of a bond, the face value of the issue must be adjusted to the net proceeds amounts by considering ________.A) the risksB) the flotation costsC) the approximate returnsD) the taxes B) the flotation costs
If a corporation has an average tax rate of 40 percent, the approximate, annual, after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950 is ________.A) 10 percentB) 10.6 percentC) 7.7 percentD) 6.0 percent C) 7.7 percent
If a corporation has an average tax rate of 40 percent, the approximate annual, after-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is ________.A) 3.6 percentB) 4.8 percentC) 6 percentD) 8 percent A) 3.6 percent
The approximate after-tax cost of debt for a 20-year, 7 percent, $1,000 par value bond selling at $960 (assume a marginal tax rate of 40 percent) is ________.A) 4.43 percentB) 5.15 percentC) 7 percentD) 7.35 percent A) 4.43 percent
Debt is generally the least expensive source of capital. This is primarily due to ________.A) the fixed interest paymentsB) the priority of claims on assets and earnings in the event of liquidationC) the tax deductibility of interest paymentsD) the secured nature of a debt obligation C) the tax deductibility of interest payments
Nico Trading Corporation is considering issuing long-term debt. The debt would have a 30-year maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm’s tax rate is 35 percent. Given this information, the after-tax cost of debt for Nico Trading would be ________.A) 7.26%B) 11.17%C) 10.00%D) 9.00% A) 7.26%
Tangshan Mining is considering issuing long-term debt. The debt would have a 30 year maturity and a 12 percent coupon rate and make semiannual coupon payments. In order to sell the issue, the bonds must be underpriced at a discount of 2.5 percent of face value. In addition, the firm would have to pay flotation costs of 2.5 percent of face value. The firm’s tax rate is 33 percent. Given this information, the after-tax cost of debt for Tangshan Mining would be ________.A) 6.38%B) 12.76%C) 4.98%D) 8.48% D) 8.48%
What is the dividend on an 8 percent preferred stock that currently sells for $45 and has a face value of $50 per share?A) $3.33B) $3.60C) $4.00D) $5.00 C) $4.00
A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost of issuing and selling the stock was $2 per share. The firm’s marginal tax rate is 40 percent. The cost of the preferred stock is ________.A) 3.9 percentB) 6.1 percentC) 9.8 percentD) 10.2 percent D) 10.2 percent
A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of the preferred stock is ________.A) 7.2 percentB) 12 percentC) 12.4 percentD) 15 percent C) 12.4 percent
A firm has determined it can issue preferred stock at $115 per share par value. The stock will pay a $12 annual dividend. The cost of issuing and selling the stock is $3 per share. The cost of the preferred stock is ________.A) 6.4 percent.B) 10.4 percent.C) 10.7 percent.D) 12 percent. C) 10.7 percent.
Tangshan Mining is considering issuing preferred stock. The preferred stock would have a par value of $75 and a 5.50 percent dividend. What is the cost of preferred stock for Tangshan if flotation costs would amount to 5.5 percent of par value?A) 5.50%B) 5.27%C) 7.73%D) 5.82% D) 5.82%
The cost of common stock equity is ________.A) the cost of the guaranteed stated dividend expected by the stockholdersB) the rate at which investors discount the expected dividends of the firm to determine its share valueC) the after-tax cost of the interest obligationsD) the historical cost of floating the stock issue B) the rate at which investors discount the expected dividends of the firm to determine its share value
The cost of common stock equity may be estimated by using the ________.A) yield curveB) break-even analysisC) Gordon modelD) DuPont analysis C) Gordon model
The cost of common stock equity may be estimated by using the ________.A) yield curveB) capital asset pricing modelC) break-even analysisD) DuPont analysis B) capital asset pricing model
The cost of retained earnings is ________.A) less than the cost of debtB) equal to the cost of a new issue of common stockC) equal to the cost of common stock equityD) irrelevant to the investment/financing decision C) equal to the cost of common stock equity
A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can ________.A) increase the proportion of long-term debt to decrease the cost of capitalB) increase the proportion of short-term debt to decrease the cost of capitalC) decrease the proportion of common stock equity to decrease financial riskD) increase the proportion of common stock equity to decrease financial risk D) increase the proportion of common stock equity to decrease financial risk
The constant-growth valuation model is based on the premise that the value of a share of common stock is ________.A) the sum of the dividends and expected capital appreciationB) determined based on an industry standard P/E multipleC) determined by using a measure of relative risk called correlation coefficientD) equal to the present value of all expected future dividends D) equal to the present value of all expected future dividends
In calculating the cost of common stock equity, the model which describes the relationship between the required return and the nondiversifiable risk of the firm is ________.A) the constant-growth modelB) the NPV modelC) the variable growth modelD) the capital asset pricing model D) the capital asset pricing model
A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals 6 percent. The estimated cost of common stock equity is ________.A) 6 percentB) 7.2 percentC) 14 percentD) 15.6 percent D) 15.6 percent
One major expense associated with issuing new shares of common stock is ________.A) coupon paymentB) sunk costC) overvaluationD) underpricing D) underpricing
One of the circumstances in which the Gordon growth valuation model for estimating the value of a share of stock should be used is ________.A) declining dividendsB) an erratic dividend streamC) the lack of data on dividend paymentsD) a steady growth rate in dividends D) a steady growth rate in dividends
A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5 percent. The cost of the firm’s common stock equity is ________.A) 5 percentB) 8 percentC) 10 percentD) 13 percent D) 13 percent
A firm has common stock with a market price of $55 per share and an expected dividend of $2.81 per share at the end of the coming year. The dividends paid on the outstanding stock over the past five years are as follows:year: dividend: 1 $2 2 2.143 2.294 2.455 2.62The cost of the firm’s common stock equity is ________.A) 4.1 percentB) 5.1 percentC) 12.1 percentD) 15.4 percent C) 12.1 percent
Using the capital asset pricing model, the cost of common stock equity is the return required by investors as compensation for ________.A) the specific risk of a firmB) a firm’s unsystematic riskC) price volatility of the stockD) a firm’s nondiversifiable risk D) a firm’s nondiversifiable risk
A firm has common stock with a market price of $100 per share and an expected dividend of $5.61 per share at the end of the coming year. A new issue of stock is expected to be sold for $98, with $2 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total $1 per share. The dividends paid on the outstanding stock over the past five years are as follows:year: Dividend:1 $4.002 4.28 3 4.584 4.905 5.24The cost of this new issue of common stock is ________.A) 5.8 percentB) 7.7 percentC) 10.8 percentD) 12.8 percent D) 12.8 percent
In comparing the constant-growth model and the capital asset pricing model (CAPM) to calculate the cost of common stock equity, ________.A) the CAPM ignores risk, while the constant-growth model directly considers risk as reflected in the betaB) the CAPM directly considers risk as reflected in the beta, while the constant-growth model uses the market price as a reflection of the expected risk-return preference of investorsC) the CAPM directly considers risk as reflected in the beta, while the constant growth model uses dividend expectations as a reflection of riskD) the CAPM indirectly considers risk as reflected in the market return, while the constant growth model uses dividend expectations as a reflection of risk B) the CAPM directly considers risk as reflected in the beta, while the constant-growth model uses the market price as a reflection of the expected risk-return preference of investors
In calculating the cost of common stock equity, ________.A) the use of the capital asset pricing model (CAPM) is often preferred, because the data required are more readily availableB) the use of the CAPM is preferred, because it directly considers risk and the effect of inflation on the stock pricesC) the use of the constant-growth valuation model is often preferred, because the data required are more readily availableD) the use of the constant-growth valuation model is often preferred, because it has a stronger theoretical foundation C) the use of the constant-growth valuation model is often preferred, because the data required are more readily available
Given that the cost of common stock is 18 percent, dividends are $1.50 per share and the price of the stock is $12.50 per share, what is the annual growth rate of dividends?A) 4 percentB) 5 percentC) 6 percentD) 8 percent C) 6 percent
What would be the cost of new common stock equity for Tangshan Mining if the firm just paid a dividend of $4.25, the stock price is $55.00, dividends are expected to grow at 8.5 percent indefinitely, and flotation costs are $6.25 per share?A) 17.22%B) 16.88%C) 9.46%D) 12.57% A) 17.22%
What would be the cost of retained earnings equity for Tangshan Mining if the expected return on U.S. Treasury Bills is 5.00%, the market risk premium is 10.00 percent, and the firm’s beta is 1.3?A) 11.5%B) 18.0%C) 10.0%D) 19.5% B) 18.0%
The cost of new common stock financing is higher than the cost of retained earnings due to ________.A) flotation costs and underpricingB) flotation costs and overpricingC) flotation costs and commission costsD) commission costs and overpricing A) flotation costs and underpricing
Since retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is ________.A) less than the cost of new common stock equityB) equal to the cost of new common stock equityC) greater than the cost of new common stock equityD) not related to the cost of new common stock equity A) less than the cost of new common stock equity
Which of the following is a reason for a firm to underprice new issues?A) When the market is in equilibrium, additional demand for shares can be achieved only at a higher price.B) When additional shares are issued, each share’s percent of ownership in a firm is diluted, thereby justifying a higher share value.C) When additional shares are issued, each share’s percent of ownership in a firm is concentrated, thereby justifying a lower share value.D) When the market is in equilibrium, additional demand for shares can be achieved only at a lower price. D) When the market is in equilibrium, additional demand for shares can be achieved only at a lower price.
The weights used in weighted average cost of capital must be ________.A) greater than 50%B) nonnegativeC) less than zeroD) zero B) nonnegative
The preferred capital structure weights to be used in the weighted average cost of capital are ________.A) book value weightsB) nominal weightsC) historic weightsD) target weights D) target weights
A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions:Source: Target Mrkt prop. after-tax costlong-term 40% 6% P. stock 10 11CS equity 50 15The weighted average cost of capital is ________.A) 6 percentB) 10.7 percentC) 11 percentD) 15 percent C) 11 percent
As the need for capital increases beyond the optimum capital structure, the cost of debt financing will ________, ________ the firm’s weighted average cost of capital.A) increase; loweringB) increase; raisingC) decrease; loweringD) decrease; raising B) increase; raising
When discussing weighing schemes for calculating the weighted average cost of capital, ________.A) market value weights are preferred over book value weights and target weights are preferred over historical weightsB) book value weights are preferred over market value weights and target weights are preferred over historical weightsC) book value weights are preferred over market value weights and historical weights are preferred over target weightsD) market value weights are preferred over book value weights and historical weights are preferred over target weights A) market value weights are preferred over book value weights and target weights are preferred over historical weights
Table 9.1A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.source of capital: target mrkt. proportions:long-term 20% P Stock 10CS equity 70Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of2 percent of the face value would be required in addition to the discount of $40.Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.Common Stock: A firm’s common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in floatation costs. Additionally, the firm’s marginal tax rate is 40 percent.
The firm’s before-tax cost of debt is ________. (See Table 9.1)A) 7.8 percentB) 10.6 percentC) 11.2 percentD) 12.7 percent A) 7.8 percent
The firm’s after-tax cost of debt is ________. (See Table 9.1)A) 3.25 percentB) 4.67 percentC) 8 percentD) 8.13 percent B) 4.67 percent
The firm’s cost of preferred stock is ________. (See Table 9.1)A) 7.2 percentB) 8.3 percentC) 13.3 percentD) 13.9 percent D) 13.9 percent
The firm’s cost of a new issue of common stock is ________. (See Table 9.1)A) 7 percentB) 9.08 percentC) 14.2 percentD) 13.4 percent C) 14.2 percent
The firm’s cost of retained earnings is ________. (See Table 9.1)A) 10.2 percentB) 13.9 percentC) 13.7 percentD) 13.6 percent C) 13.7 percent
The weighted average cost of capital up to the point when retained earnings are exhausted is ________. (See Table 9.1)A) 7.5 percentB) 8.65 percentC) 10.4 percentD) 11.9 percent D) 11.9 percent
If the target market proportion is reduced to 15 percent, what will be the revised weighted average cost of capital? (See Table 9.1)A) 13.6 percentB) 11.0 percentC) 12.34 percentD) 10.4 percent C) 12.34 percent

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