1.
Coupon rate = 7 percent
Average tax rate = 32%
Price of common stock = $80
Price of preferred stock = $50
Bond yield risk premium = 7%
Return of the market = 12%
Marginal tax rate = 35%
Common stock dividend (Do) = $6
Preferred stock dividend (Do) = $4
Growth rate of common stock dividend = 6%
Risk-free rate of return = 6%
Beta = 1.2
According to the information given, what is the cost of equity using the capital asset pricing model?
A. 12 percent
B. 13.2 percent
C. 14.4 percent
D. 13.95 percent
2. The net present value of an investment will be higher if
A. the cost of capital is higher.
B. there's no salvage value.
C. the cost of the investment is lower.
D. a firm uses straight-line depreciation.
3.
Coupon rate = 7 percent
Average tax rate = 32%
Price of common stock = $80
Price of preferred stock = $50
Bond yield risk premium = 7%
Return of the market = 12%
Marginal tax rate = 35%
Common stock dividend (Do) = $6
Preferred stock dividend (Do) = $4
Growth rate of common stock dividend = 6%
Risk-free rate of return = 6%
Beta = 1.2
According to the information given, what is the cost of equity using the bond yield plus risk premium method?
A. 14 percent
B. 12 percent
C. 13.95 percent
D. 13.2 percent
4. The optimal capital structure involves
A. minimizing the weighted average of the cost of funds.
B. maximizing the cost of all funds.
C. maximizing the weighted average of the cost of funds.
D. minimizing the cost of all funds.
5. Which of the following statements about the marginal cost of capital is correct?
A. The marginal cost of capital declines as flotation costs alter equity financing.
B. The marginal cost of capital is a firm's cost of debt and equity finance.
C. The marginal cost of capital is constant once the optimal capital structure is determined.
D. The marginal cost of capital refers to the cost of additional funds.
6. The internal rate of return will be higher if the cost of
A. the investment is higher.
B. the investment is lower.
C. capital is lower.
D. capital is higher.
7. An increase of cost of capital will
A. increase an investment's IRR.
B. Increase an investment's NPV.
C. decrease an investment's IRR.
D. decrease an investment's NPV.
8. A firm has two investment opportunities. Each investment costs $2,000, and the firm's cost of capital is 8 percent. The cash flows of each investment are as follows:
Cash Flow of Investment A
Year 1: $1800
Year 2: $600
Year 3: $500
Year 4: $400
Cash Flow of Investment B
Year 1: $900
Year 2: $900
Year 3: $900
Year 4: $900
According to the information, the NPV for Investment A is
A. $3,300.
B. $2,871.
C. $871.
D. $1,300.
9. A firm has two investment opportunities. Each investment costs $2,000, and the firm's cost of capital is 8 percent. The cash flows of each investment are as follows:
Cash Flow of Investment A
Year 1: $1800
Year 2: $600
Year 3: $500
Year 4: $400
Cash Flow of Investment B
Year 1: $900
Year 2: $900
Year 3: $900
Year 4: $900
Based on the information, if the investments are independent, the firm should select
A. the higher IRR investment.
B. only one investment if the IRR is greater than 8 percent.
C. all investments with an IRR that's less than 8 percent.
D. all investments with an IRR that's greater than 8 percent.
10. Which of the following statements about retained earnings is correct?
A. Retained earnings have no cost.
B. Retained earnings are cheaper than the cost of new shares.
C. Retained earnings are the firm's cheapest source of funds.
D. Retained earnings have the same cost as new shares of stock.
11. A firm should make an investment if the present value of the cash inflows on the investment is
A. less than the cost of the investment.
B. less than zero.
C. greater than the cost of the investment.
D. greater than zero.
12.
Coupon rate = 7 percent
Average tax rate = 32%
Price of common stock = $80
Price of preferred stock = $50
Bond yield risk premium = 7%
Return of the market = 12%
Marginal tax rate = 35%
Common stock dividend (Do) = $6
Preferred stock dividend (Do) = $4
Growth rate of common stock dividend = 6%
Risk-free rate of return = 6%
Beta = 1.2
According to the information given, what is the cost of debt?
A. 4.55 percent
B. 2.45 percent
C. 6.25 percent
D. 7.0 percent
13. A firm has two investment opportunities. Each investment costs $2,000, and the firm's cost of capital is 8 percent. The cash flows of each investment are as follows:
Cash Flow of Investment A
Year 1: $1800
Year 2: $600
Year 3: $500
Year 4: $400
Cash Flow of Investment B
Year 1: $900
Year 2: $900
Year 3: $900
Year 4: $900
Based on the information, if the investments are mutually exclusive, the firm should select
A. neither investment.
B. both investments.
C. the higher-payback investment.
D. the higher NPV investment.
14. NPV may be preferred to IRR because
A. IRR excludes salvage value.
B. NPV excludes salvage value.
C. NPV makes more conservative assumptions concerning reinvesting.
D. IRR makes more conservative assumptions concerning reinvesting.
15. The flotation costs of issuing new securities
A. don't affect the cost of capital.
B. encourage external financing.
C. decrease the cost of capital.
D. encourage the retention of earnings.
16. A firm should reject an investment if the internal rate of return on the investment is
A. less than the interest rate.
B. greater than the interest rate.
C. less than the cost of capital.
D. greater than the cost of capital.
17. Which of the following statements best explains why a rising ratio of debt-to-total assets increases the cost of debt?
A. If debt remains constant while the ratio increases, rising assets must be finance with more expensive equity financing.
B. As debt increases, the contribution of more expensive equity financing decreases.
C. As total assets decline in relation to a stable debt level, equity declines.
D. As the ratio increases, creditors require higher interest rates to compensate them for higher default risk.
18. If the net present values of two mutually exclusive investments are positive, a firm should select
A. neither investment.
B. both investments.
C. the investment with the higher present value.
D. the investment with the higher net present value.
19. A firm has two investment opportunities. Each investment costs $2,000, and the firm's cost of capital is 8 percent. The cash flows of each investment are as follows:
Cash Flow of Investment A
Year 1: $1800
Year 2: $600
Year 3: $500
Year 4: $400
Cash Flow of Investment B
Year 1: $900
Year 2: $900
Year 3: $900
Year 4: $900
According to the information, the NPV for Investment B is
A. $1,600.
B. $3,600.
C. $2,980.
D. $980.
20. Which of the following statements about the cost of debt is correct?
A. The cost of debt is equal to the firm's interest rate.
B. The cost of debt is greater than the cost of equity.
C. The cost of debt is greater than the cost of preferred stock.
D. The cost of debt is less than the cost of equity.
