The cost of capital is the rate of return a firm must earn on investments in order to leave share price unchanged.
If risk is unchanged, the undertaking of projects with a rate of return above the cost of capital will decrease the value of the firm.
The specific cost of each source of financing is viewed on a before tax basis.
The net proceeds used in calculation of the cost of long-term debt are funds actually received from the sale after paying flotation costs.
When the net proceeds from the sale of a bond equal its par value, the coupon interest rate will be the bond's before tax cost of capital.
The cost of preferred stock is typically lower than the cost of long-term debt because dividends paid on preferred stock are tax deductible.
The cost of common stock equity may be measured using either zero growth valuation model or the CAPM.
The cost of retained earnings is always lower than the cost of a new issue of common stock due to the absence of flotation costs.
The CAPM describes the relationship between the required return and the non systematic risk of the firm as measured by the beta coefficient.
Larger volumes of new financing are associated with greater risk and lead to higher financial costs.
Since preferred stock is a form of ownership, the stock will never mature.
The weighted marginal cost of capital is the firm's weighted average cost of capital associated with its next dollar of total financing.
A firm's investment opportunities schedule is a ranking of investment possibilities for worse (lowest return) to best (highest return).
As cumulative amount of money invested in a firm's capital project increases, its returns on the projects will increase.
According to the firm's owner wealth maximization goal, the firm should accept projects up to the point where the marginal return on its investment equals its weighted marginal cost of capital.
The component cost of capital are market-determined variables in as much as they are based on investor's required returns.
The cost of issuing preferred stock by a corporation must be adjusted to an after-tax figure because of the 70% dividend exclusion provision for corporations holding other corporations' preferred stock.
The weighted average cost of capital increases if the total funds required call for an amount of equity in excess of what can be obtained as retained earnings.
In capital budgeting and cost of capital analyses, the firm should always consider retained earnings as the first source of capital, since this is a free source of funding to the firm.
The cost of capital should reflect the average cost of the various sources of long-term funds a firm uses to support its assets.
The _____ is the rate of return a firm must earn on its investment in order to maintain the market value of its stock.
gross profit margin
internal rate of return
net present value
cost of capital
_____ refers to the risk of the firm being unable to cover its operation costs.
Financial risk
Total risk
Business risk
Nonsystematic
The cost of capital reflects the cost of funds _____.
over the short run
at current book value
at historical values
over the long run
The firm's optimal mix of debt and equity is called _____.
target capital structure
maximum wealth ratio
optimal mix
debt to equity ratio
The specific cost of each source of long-term financing is based on _____ and _____ costs.
before-tax; current
after-tax; historical
after-tax; current
before-tax; historical
A tax adjustment must be made in determining the cost of _____.
common stock
long-term debt
retained earnings
preferred stock
A firm has issued 8% preferred stock, which sold for $100 per share par value. The flotation costs of the stock equaled $3 and the firm's marginal tax rate is 40%. The cost of the preferred stock is
8.25%
7.5%
7.35%
9.85%
The approximate before-tax cost of debt for a 20 year, 9%, $1000 par value bond selling at $950 is
10.63%
11.39%
7.45%
9.49%
The cost of common stock equity may be estimated by using the
IRR
NPV
Constant growth valuation model
MIRR model
The cost of retained earnings is equal t
the cost of long-term debt
the cost of common stock equity
zero
the marginal cost of capital
The firm has a beta of .90. The market return equals 12% and the risk free rate of return equals 4%. The estimated cost of common stock equity is _____
11.2%
9.8%
10.4%
12.6%
One major expense associated with issuing new shares of common stock is
legal fees
underwriting fees
registration fees
underpricing
A firm has common stock with a market price of $45 per share and an expert dividend of $3 per share at the end of the coming year. The growth rate in dividends has been 4%. The cost of the firm's common stock equity is
9.75%
10.67%
8.42%
11.25%
Generally the least expensive form of long-term capital is _____
short-term debt
A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources: Source of capital proportion after-tax cost long-term debt 45% 7% preferred stock 15% 10% common stock equity 40% 14%
the weighted average cost of capital is _____
10.25%
11.45%
8.35%
A firm's before-tax cost of long-term debt 10.45%. what is the firm's after tax cost of long-term debt if the firm has a 40% corporate tax rate?
8.48%
6.27%
5.32%
In calculating the cost of common stock equity, the model having the stronger theoretical foundation is the _____.
Gordon model
variable growth model
zero growth model
CAPM
A firm has discovered that its retained earnings of $400,000 will soon be exhausted. What is the point at which th firm will non longer be able to sustain the retained earnings cost of 6% if the historical weight of debt in the firm's WACC is 40%.
$750,000
$160,000
$1,000,000
$100,000
When determining the after-tax cost of a bond, the face value of the bond must be adjusted to the net proceeds amount by considering _____.
risk
flotation cost
taxes
returns
When the face value of a bond equals its selling price, the firm's cost of the bond will be equal to
the coupon interest rate
the firm's WACC
the risk free rate
the firm's WMCC
Which of the following statements is most correct?
Under normal conditions, the CAPM approach to estimating a firm's cost of retained earnings gives a better estimate than other approaches.
The risk premium used in the bond-yield-plus-risk-premiun methods is the same as the one used in the CAPM method.
The CAPM approach is typically used to estimate a firm's flotation cost adjustment factor, and this factor is added to the DCF cost estimate.
The above statements are all false.
Micro Corp's common stock is currently selling sfor $50 per share. Current dividends is $2 per share. If dividends are expected to grow 6% per year and its flotation costs are 10%, then what is the firm's cost of retained earnings and cost of new common stock?
10.71%; 10.24%
10.24%; 10.71%
10.24%; 11.38%
11.38%; 10.71%
Project A has a cost of $200 million and a rate of return of 13%, while project B has a cost of $125 million and a rate of return of 10%. All of the company's potential projects are equally risky. Which of the following may be true concerning debt and equity?
Cost of debt of firm A > Cost of equity of firm A
Cost of debt of firm A > Cost of equity of firm B
the cost of internally generated equity for firm A > cost of externally generated equity funds of firm A
the cost of internally generated equity for firm A < cost of debt for firm A
