Question 1

When determining the after-tax cost of a bond, the face value of the issue must be adjusted to the net proceeds amount by considering

Accepted Answer

Flotation costs are the expenses incurred by a company in issuing new securities. Since these costs reduce the net proceeds of a bond, they must be considered when calculating the after-tax cost of a bond. Taxes, approximate returns, and risk do not directly influence the net proceeds of a bond issuance.

Question 2

The investment opportunity schedule combined with the weighted marginal cost of capitalindicates

Accepted Answer

The investment opportunity schedule and the weighted marginal cost of capital help identify projects that have returns exceeding the firm's cost of capital, making them acceptable investments.

Question 3

The investment opportunity schedule (IOS) is

Accepted Answer

The investment opportunity schedule (IOS) is a ranking of capital projects based on their internal rate of return (IRR) from best to worst, helping firms prioritize investments.

Question 4

The cost utilized in making capital budgeting decisions given an investment opportunity scheduleis

Accepted Answer

The answer of The cost utilized in making capital budgeting...

Question 5

The cost of retained earnings is

Accepted Answer

The cost of retained earnings is considered equal to the cost of common stock equity because it represents the return required by equity investors.

Question 6

According to the investment opportunity schedule (IOS), as the cumulative amount of moneyinvested in a project increases, the return on the projects will

Accepted Answer

As more money is invested in a project, the return on additional investment typically decreases due to diminishing marginal returns.

Question 7

The cost of capital reflects the cost of funds

Accepted Answer

The answer of The cost of capital reflects the cost...

Question 8

The Titanic Company has just gone public. Under a firm commitment agreement, Titanic received$14 for each of the 2 million shares sold. The initial offering price was $15 per share, and the stockrose to $16.40 per share in the first few minutes of trading. Titanic paid $500,000 in administrative costs. The total floatation costs for the new issue are

Accepted Answer

The answer of The Titanic Company has just gone public....

Question 9

Which of the following companies would have the greatest business risk?

Accepted Answer

Air Canada is in the airline industry which is known for high business risk due to factors such as high operating costs, vulnerability to economic cycles, and challenges related to safety and security. On the other hand, Manitoba Telephone System is a government-owned telecommunications company, Royal Bank of Canada is a well-established and diversified bank, and Canada Safeway is a grocery store chain which all have relatively lower business risk in comparison to Air Canada.

Question 10

The cost of common stock equity may be estimated by using the

Accepted Answer

The Gordon model, also known as the dividend discount model, is a commonly used method for estimating the cost of common equity. It takes into account the current dividend per share, the expected growth rate of dividends, and the required rate of return by investors. The formula for the Gordon model is:

Cost of Equity = (Expected Dividend / Current Stock Price) + Expected Dividend Growth Rate

Using this model, a company can estimate the return required by investors in order to compensate for the risk of investing in the company's common stock.

Question 11

The cost of common stock equity may be estimated by using the

Accepted Answer

The capital asset pricing model (CAPM) is a widely used method for estimating the cost of common stock equity. It takes into account the risk-free rate, the expected return on the market, and the stock's beta (a measure of its volatility). The CAPM can provide a reasonable estimate of a company's cost of equity, which is important for determining its overall cost of capital. Options A, B, and D are not appropriate methods for estimating the cost of common stock equity.

Question 12

Since retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is

Accepted Answer

Retained earnings are considered less costly than new common stock equity because they do not involve flotation costs or the issuance of new shares, which can dilute existing ownership.

Question 13

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 thepreferred stock is

Accepted Answer

The cost of preferred stock is the dividend divided by the net proceeds per share. The net proceeds per share is equal to the issue price per share minus the flotation cost per share.

Net proceeds per share = $115 - $3 = $112

Cost of preferred stock = $12 / $112 = 0.107 or 10.7%

Question 14

The cost of equity for a firm is 12% and its cost of debt is 6%. Ignoring taxes, what is the firm'sWACC if its debt-to-equity ratio is 1.0?

Accepted Answer

The WACC is calculated as the weighted average of the cost of equity and the cost of debt. With a debt-to-equity ratio of 1.0, the weights for both debt and equity are equal (50% each). Therefore, WACC = 0.5 * 12% + 0.5 * 6% = 9%.

Question 15

In calculating the cost of common stock equity, the model having the stronger theoretical foundation is

Accepted Answer

The capital asset pricing model (CAPM) has a stronger theoretical foundation as it takes into account the risk of an investment by considering the expected return of the market and the specific risk of the stock. The constant growth model (also known as the Gordon model) only considers the expected growth rate of dividends and does not account for risk, while the variable growth model has limitations in its assumptions about future growth rates.

Question 16

The___________ is a weighted average of the cost of funds which reflects the interrelationship of  financing decisions.

Accepted Answer

The cost of capital is the best choice as it represents the total cost incurred by a company for raising funds. It includes the cost of both debt and equity and takes into account the risk involved in the financing decisions. The risk premium, nominal cost, and risk-free rate are all factors that contribute to calculating the cost of capital but are not standalone choices for financing decisions.

Question 17

Generally the least expensive source of long-term capital is

Accepted Answer

The answer of Generally the least expensive source of long-term...

Question 18

A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost ofissuing and selling the stock was $2 per share. The firm's marginal tax rate is 40 percent. The costof the preferred stock is

Accepted Answer

The cost of preferred stock is the dividend rate divided by the net proceeds after flotation costs. 
Dividend rate = 10% of $100 = $10
Net proceeds = $100 - $2 = $98
Cost of preferred stock = ($10 / $98) = 10.2%

Question 19

One major expense associated with issuing new shares of common stock is

Accepted Answer

The answer of One major expense associated with issuing new...

Question 20

Given that the cost of common stock is 18 percent, dividends are $1.50 per share, and the price ofthe stock is $12.50 per share, what is the annual growth rate of dividends?

Accepted Answer

The cost of common stock (required rate of return) is calculated using the formula: Cost of Equity = (Dividends/Price) + Growth Rate. Rearranging for the growth rate gives: Growth Rate = Cost of Equity - (Dividends/Price). Substituting the given values: Growth Rate = 0.18 - (1.50/12.50) = 0.18 - 0.12 = 0.06 or 6%.

Quiz 9: The Cost of Capital

When determining the after-tax cost of a bond, the face value of the issue must be adjusted to the net proceeds amount by considering

The investment opportunity schedule combined with the weighted marginal cost of capitalindicates

The investment opportunity schedule (IOS) is

The cost utilized in making capital budgeting decisions given an investment opportunity scheduleis

The cost of retained earnings is

According to the investment opportunity schedule (IOS) , as the cumulative amount of moneyinvested in a project increases, the return on the projects will

The cost of capital reflects the cost of funds

Which of the following companies would have the greatest business risk?

The cost of common stock equity may be estimated by using the

The cost of common stock equity may be estimated by using the

Since retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is

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 thepreferred stock is

The cost of equity for a firm is 12% and its cost of debt is 6%. Ignoring taxes, what is the firm'sWACC if its debt-to-equity ratio is 1.0?

In calculating the cost of common stock equity, the model having the stronger theoretical foundation is

The___________ is a weighted average of the cost of funds which reflects the interrelationship of financing decisions.

Generally the least expensive source of long-term capital is

A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost ofissuing and selling the stock was $2 per share. The firm's marginal tax rate is 40 percent. The costof the preferred stock is

One major expense associated with issuing new shares of common stock is

Given that the cost of common stock is 18 percent, dividends are $1.50 per share, and the price ofthe stock is $12.50 per share, what is the annual growth rate of dividends?