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Cost of Capital
Cost of Capital MCQs
?
A major use of warrants in financing is to
Lower the cost of debt.
Avoid dilution of earnings per share.
Maintain managerial control.
Permit the buy-back of bonds before maturity.
?
Maloney, Inc.’s 1,000 par value preferred stock paid its 100 per share annual dividend on April 4 of the current year. The preferred stock’s curre...
6%
6.25%
10%
10.4%
?
The theory underlying the cost of capital is primarily concerned with the cost of
Long-term funds and old funds.
Short-term funds and new funds.
Long-term funds and new funds.
Short-term funds and old funds.
?
Osgood Products has announced that it plans to finance future investments so that the firm will achieve an optimum capital structure. Which one of the...
Maximize earnings per share.
Minimize the cost of debt.
Maximize the net worth of the firm.
Minimize the cost of equity.
?
When calculating the cost of capital, the cost assigned to retained earnings should be
Zero.
Lower than the cost of external common equity.
Equal to the cost of external common equity.
Higher than the cost of external common equity.
?
Global Company Press has $150 par value preferred stock with a market price of $120 a share. The organization pays a 15 per share annual dividend. Glo...
6%
7.5%
10%
12.5%
?
What is the after-tax cost of preferred stock that sells for $5 per share and offers a $0.75 dividend when the tax rate is 35%?
5.25%
9.75%
10.50%
15%
?
What is the weighted average cost of capital for a firm with equal amounts of debt and equity financing, a 15% before-tax company cost of equity capit...
8.775%
9.60%
11.40%
13.50%
?
If k is the cost of debt and t is the marginal tax rate, the after-tax cost of debt, ki, is best represented by the formula
ki= k ÷ t
ki= k ÷ (1 – t)
ki = k(t)
ki = k(1 – t)
?
A firm’s target or optimal capital structure is consistent with which one of the following?
Maximum earnings per share.
Minimum cost of debt.
Minimum risk.
Minimum weighted-average cost of capital.
?
What return on equity do investors seem to expect for a firm with a $50 share price, an expected dividend of $5.50, a β of .9, and a constant growth ...
15.05%
15.50%
15.95%
16.72%
?
In calculating the component costs of long-term funds, the appropriate cost of retained earnings, ignoring flotation costs, is equal to
The cost of common stock.
The same as the cost of preferred stock.
The weighted average cost of capital for the firm.
Zero, or no cost.
?
Which of the following, when considered individually, would generally have the effect of increasing a firm’s cost of capital? I. The firm redu...
I and III.
II and IV.
III and IV.
I, III and IV.
?
Angela Company’s capital structure consists entirely of long-term debt and common equity. The cost of capital for each component is shown below. Lo...
34%
45%
55%
66%
?
Joint Products, Inc., a corporation with a 40% marginal tax rate, plans to issue $1,000,000 of 8% preferred stock in exchange for $1,000,000 of its 8%...
No change, since it involves equal amounts of capital in the exchange and both instruments have the same rate.
A decrease, since a portion of the debt payments are tax deductible.
A decrease, since preferred stock payments do not need to be made each year, whereas debt payments must be made.
An increase, since a portion of the debt payments are tax deductible.
?
Zeta Corporation’s current-year earnings are $2.00 per share. Using a discounted cash flow model, the controller determines that Zeta’s common sto...
20%
15%
10%
7%
?
A company has a weighted-average cost of capital of 12.8%. If the after-tax cost of debt is 8%, and the weight on debt is 20%, what is the company’s...
11.2%
14.0%
18.0%
26.0%
?
Ten years ago, Ellison Group issued perpetual preferred shares with a par value of $50 and an annual dividend rate of 6%. Currently, there are no divi...
4.56%
6.00%
7.89%
15.79%
?
The weighted-average cost of capital is equal to the
Rate of return on assets that covers the costs associated with the funds employed.
Average rate of return a firm earns on its assets.
Minimum rate a firm must earn on high-risk projects.
Cost of the firm’s equity capital at which the market value of the firm will remain unchanged.
?
Beck, Inc., issued $100,000, 15-year term bonds with a coupon rate of 8% at par. Interest is paid annually to bondholders. Beck’s effective income t...
8%
6.4%
5.2%
3.6%
?
A preferred stock is sold for $101 per share, has a face value of $100 per share, underwriting fees of $5 per share, and annual dividends of $10 per s...
4.2%
6.25%
10.0%
10.4%
?
The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods,...
4%
6%
10%
14%
?
The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods,...
6.25%
15%
16.25%
10%
?
The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods,...
5%
9%
10%
15%
?
The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods,...
$2 million.
$3 million.
$5 million.
Cannot determine from the information given.
?
The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods,...
11.14%
12.74%
13.6%
16%
?
The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods,...
10%
12.74%
13.6%
16%
?
Williams, Inc., is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described as follows, the ...
7.0%
7.6%
7.4%
8.1%
?
Williams, Inc., is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described as follows, the ...
19.8%
4.8%
6.5%
6.8%
?
DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ plans to use the following combination of debt and equity to ...
11.80%
8.08%
10.00%
7.92%
?
DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ plans to use the following combination of debt and equity to ...
10.50%
8.50%
9.50%
6.30%
?
The common stock of the Nicolas Corporation is currently selling at $80 per share. The leadership of the company intends to pay a $4 per share dividen...
5%
5.25%
7.5%
10%
?
Enert, Inc.’s current capital structure is shown below. This structure is optimal, and the company wishes to maintain it. Debt 25% Preferred equit...
52.50%
50.00%
70.00%
56.00%
?
Which one of a firm’s sources of new capital usually has the lowest after-tax cost?
Retained earnings.
Bonds.
Preferred stock.
Common stock.
?
The DCL Corporation is preparing to evaluate the capital expenditure proposals for the coming year. Because the firm employs discounted cash flow meth...
16.11%
15.56%
15.05%
15.00%
?
Rogers, Inc., operates a chain of restaurants located in the Southeast. The company has steadily grown to its present size of 48 restaurants. The boar...
16.00%
16.53%
16.60%
17.16%
?
Rogers, Inc., operates a chain of restaurants located in the Southeast. The company has steadily grown to its present size of 48 restaurants. The boar...
5.13%
5.40%
5.63%
6.60%
?
Maylar Corporation has sold $50 million of $1,000 par value, 12% coupon bonds. The bonds were sold at a discount and the corporation received $985 per...
7.31%
4.87%
12.00%
7.09%
?
Acme Corporation is selling $25 million of cumulative, non-participating preferred stock. The issue will have a par value of $65 per share with a div...
5.42%
5.74%
6.00%
6.09%
?
By using the dividend growth model, estimate the cost of equity capital for a firm with a stock price of $30.00, an estimated dividend at the end of t...
21.1%
12.2%
11.0%
20.0%
?
A firm seeking to optimize its capital budget has calculated its marginal cost of capital and projected rates of return on several potential projects....
Calculating the point at which marginal cost of capital meets the projected rate of return, assuming that the most profitable projects are accepted first.
Calculating the point at which average marginal cost meets average projected rate of return, assuming the largest projects are accepted first.
Accepting all potential projects with projected rates of return exceeding the lowest marginal cost of capital.
Accepting all potential projects with projected rates of return lower than the highest marginal cost of capital.
?
A company has made the decision to finance next year’s capital projects through debt rather than additional equity. The benchmark cost of capital fo...
The before-tax cost of new-debt financing.
The after-tax cost of new-debt financing.
The cost of equity financing.
The weighted-average cost of capital.
?
The firm’s marginal cost of capital
Should be the same as the firm’s rate of return on equity.
Is unaffected by the firm’s capital structure.
Is inversely related to the firm’s required rate of return used in capital budgeting.
Is a weighted average of the investors’ required returns on debt and equity.
?
Datacomp Industries, which has no current debt, has a beta of .95 for its common stock. Management is considering a change in the capital structure to...
No, because the cost of equity capital will increase.
Yes, because the cost of equity capital will decrease.
Yes, because the weighted-average cost of capital will decrease.
No, because the weighted-average cost of capital will increase.
?
Lox has sold 1,000 shares of $100 par, 8% preferred stock at an issue price of $92 per share. Stock issue costs were 5 per share. Lox pays taxes at th...
8.00%
8.25%
8.70%
9.20%
?
The management of Old Fenske Company (OFC has been reviewing the company’s financing arrangements. The current financing mix is $750,000 of common s...
9.5%
14.2%
15.8%
16.0%
?
Pane Software, Inc., has total capital of $100 million, and its cost of capital is 12%. A new project has been proposed that will require additional c...
6.40%
7.56%
10.00%
11.82%
?
Peson, Inc., a manufacturer of printers, is attempting to determine its cost of common equity for cost of capital purposes. Peson’s long-term d...
9.82%
10.11%
16.37%
16.85%
?
A profitable firm is reviewing alternatives to raise additional capital. It estimates that it can issue debt at a yield of 6% or, alternately, issue p...
-6.00%, preferred shares- 7.00%-
-3.78%, preferred shares- 7.00%-
-3.78%, preferred shares- 4.41%-
-6.00%, preferred shares- 4.41%-
?
Mackinaw Coats, Inc., is planning to issue additional shares of common stock in a public offering. The current market price of Mackinaw stock is $38, ...
13.9%
14.0%
14.3%
14.8%
?
Which of the following statements is correct regarding the weighted-average cost of capital (WACC)?
One of a company’s objectives is to minimize the WACC.
A company with a high WACC is attractive to potential shareholders.
An increase in the WACC increases the value of the company.
WACC is always equal to the company’s borrowing rate.
