Question 1

Which of the following statements is false?

Accepted Answer

The first break point a firm encounters in capital budgeting is typically for debt, not retained earnings. Retained earnings are usually available at no cost and do not have a specific break point.

Question 2

A graph of a firm's acceptable capital projects ranked in the order of the projects' internal rate of return is called the firm's ______________.

Accepted Answer

A graph of a firm's acceptable capital projects ranked in the order of the projects' internal rate of return is called the investment opportunity schedule. The other options are not applicable to this concept.

Question 3

Which of the following may be true concerning debt and equity?

Accepted Answer

The cost of debt is usually lower than the cost of equity because debt holders have priority over equity holders in the event of bankruptcy. Therefore, option A is not true. Option C is also not true because internally generated equity usually has a lower cost than externally generated equity since there are no issuing or underwriting costs. Option D is also not true because debt is usually less expensive than equity. Therefore, the only option that could be true is B, where the cost of debt for Firm A is greater than the cost of equity for Firm B.

Question 4

Which of the following statements is correct?

Accepted Answer

The CAPM approach assumes that stockholders are well diversified, which may not always be the case. If they are not well diversified, beta may not accurately measure the firm's risk, and therefore the cost of equity capital may be misestimated. The other statements are incorrect. The cost of capital used to evaluate a project should be the weighted average cost of all forms of financing used by the firm. The cost of debt used in calculating the weighted average cost of capital is generally the current market interest rate on debt issued by the firm. The bond-yield-plus-risk-premium approach is a simplistic method of estimating cost of equity capital, and not the most sophisticated and objective method. The cost of equity capital is generally more difficult to measure than the cost of debt and preferred stock.

Question 5

Which of the following statements is correct?

Accepted Answer

None of the statements are correct. The CAPM and DCF approaches can produce different estimates of a firm's cost of capital, and the risk premium used in the bond-yield-plus-risk-premium method is typically different from the one used in the CAPM method. In practice, the two methods can also produce different estimates due to variations in assumptions and inputs.

Question 6

Which of the following statements is correct?

Accepted Answer

The answer of Which of the following statements is correct?
...

Question 7

Which of the following statements is most correct?

Accepted Answer

A steep demand curve for new equity, indicating high flotation costs, can lead to a situation where additional financing becomes progressively more expensive, thus potentially leading to a steeply upward sloping WACC curve as more capital is raised.

Question 8

The target capital structure of a firm is the capital structure that

Accepted Answer

The answer of The target capital structure of a firm...

Question 9

Which of the following statements is correct?

Accepted Answer

Beta measures the market risk of a stock, but it does not necessarily capture other sources of risk such as firm-specific or unsystematic risk. If a company's stockholders are not well diversified, beta may not accurately measure the firm's total risk, as there may be additional risks that are specific to the company.

Question 10

In applying the CAPM to estimate the cost of equity capital,which of the following elements is not subject to dispute or controversy?

Accepted Answer

All elements in the CAPM model, including the expected market return, stock's beta, risk-free rate, and market risk premium, can be subject to dispute due to varying assumptions and estimations used in their calculation.

Question 11

Consider the discussions concerning the cost of common equity.What is the relationship between the cost of retained earnings (internal equity),rs,and the cost of new common equity (external equity),re?

Accepted Answer

Retaining earnings involves an opportunity cost as the firm forgoes the distribution of earnings to shareholders. This is reflected in the cost of retained earnings (rs) being less than the cost of new common equity (re). Additionally, when a firm issues new common stock, it incurs flotation costs, which also contribute to the higher cost of external equity. Therefore, option C is the correct answer. Option A is incorrect because new stockholders do not accept a lower return; in fact, they demand a higher return to compensate for the risks associated with investing in a new firm. Option B is incorrect as retained earnings do have a cost, as explained earlier. Option D is incorrect as retained earnings and new common stock represent different sources of funds, and therefore, can have different costs.

Question 12

Diggin Tools just issued new preferred stock,which sold for $85 in the stock markets.Holders of the stock will receive an annual dividend equal to $9.35.The flotation costs associated with the new issue were 6 percent and Diggin's marginal tax rate is 30 percent.What is Diggins cost of preferred stock,kps?

Accepted Answer

The answer of Diggin Tools just issued new preferred stock,which...

Question 13

Which of the following statements is correct?

Accepted Answer

The after-tax cost of debt is calculated as the before-tax cost of debt multiplied by (1 - marginal tax rate). However, if a firm is not paying taxes because it is losing money, then the tax rate is zero, and the after-tax cost of debt is equal to its before-tax cost of debt.

Question 14

The marginal cost of capital __________ as more capital is raised during a given period.

Accepted Answer

The marginal cost of capital is the cost of raising an additional unit of capital. As more capital is raised during a given period, the cost of raising additional capital tends to increase, due to factors such as higher interest rates, increased investor skepticism, and greater risk of dilution for existing shareholders.

Question 15

Which of the following statements is correct?

Accepted Answer

If a firm has a zero tax rate, the after-tax cost of debt will also be zero, while the after-tax cost of preferred stock may still be positive. Therefore, it is possible that the after-tax cost of preferred stock is less than the after-tax cost of debt in this situation. A, C, and D are incorrect statements.

Question 16

Which of the following steps is not necessary for calculating the marginal cost of capital schedule?

Accepted Answer

The answer of Which of the following steps is not...

Question 17

Typically,according to the text,the MCC schedule is either horizontal or rising,which implies that the cost of capital to a firm increases as it raises larger and larger amounts of capital.The rising section of MCC schedule

Accepted Answer

The answer of Typically,according to the text,the MCC schedule is...

Question 18

Which of the following is least likely to lead to a break point in the marginal cost of capital schedule?

Accepted Answer

Using retained earnings to fund new projects for the firm will not involve external financing, therefore it is least likely to lead to a break point in the marginal cost of capital schedule. The other options involve external financing and can potentially affect the cost of capital. An increase in required return for a new bond issue, increased flotation costs for seasoned equity offerings, decreased liquidity in money markets leading to lower selling prices for commercial paper, and issuing preferred stock to institutional investors can all increase the cost of capital and potentially lead to a break point in the schedule.

Question 19

Bouchard Company's stock sells for $20 per share,its last dividend (D0)was $1.00,its growth rate is a constant 6 percent,and the company would incur a flotation cost of 20 percent if it sold new common stock.Retained earnings for the coming year are expected to be $1,000,000,and the common equity ratio is 60 percent.If Bouchard has a capital budget of $2,000,000,what component cost of common equity will be built into the WACC for the last dollar of capital the company raises?

Accepted Answer

The answer of Bouchard Company's stock sells for $20 per...

Question 20

Which of the following statements is most correct?

Accepted Answer

The answer of Which of the following statements is most...

Quiz 11: The Cost of Capital

Which of the following statements is false?

A graph of a firm's acceptable capital projects ranked in the order of the projects' internal rate of return is called the firm's ______________.

Which of the following may be true concerning debt and equity?

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following statements is most correct?

The target capital structure of a firm is the capital structure that

Which of the following statements is correct?

In applying the CAPM to estimate the cost of equity capital,which of the following elements is not subject to dispute or controversy?

Consider the discussions concerning the cost of common equity.What is the relationship between the cost of retained earnings (internal equity) ,rs,and the cost of new common equity (external equity) ,re?

Which of the following statements is correct?

The marginal cost of capital __________ as more capital is raised during a given period.

Which of the following statements is correct?

Which of the following steps is not necessary for calculating the marginal cost of capital schedule?

Typically,according to the text,the MCC schedule is either horizontal or rising,which implies that the cost of capital to a firm increases as it raises larger and larger amounts of capital.The rising section of MCC schedule

Which of the following is least likely to lead to a break point in the marginal cost of capital schedule?

Which of the following statements is most correct?