Cost of Capital

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.

_____ refers to the risk of the firm being unable to cover its operation costs.

The cost of capital reflects the cost of funds _____.

The firm's optimal mix of debt and equity is called _____.

The specific cost of each source of long-term financing is based on _____ and _____ costs.

A tax adjustment must be made in determining the cost of _____.

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

The approximate before-tax cost of debt for a 20 year, 9%, $1000 par value bond selling at $950 is

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

The cost of retained earnings is equal t

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 _____

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

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

Generally the least expensive form of long-term capital is _____

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 _____

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?

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

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%.

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 _____.

When the face value of a bond equals its selling price, the firm's cost of the bond will be equal to

Which of the following statements is most correct?

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?

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?