fmgt ch 11

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fmgt ch 11
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fmgt ch 11
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  1. The general rule for using the weighted average cost of capital (WACC) in capital budgeting decisions is accept all projects with
    a. rates of return greater than or equal to the WACC
    b. rates of return less than the WACC
    c. rates of return equall to or less than the WACC
    d. positive rates of return
    a rates of return greater than or equal to the WACC
  2. The use of optimum capital structure minimizes the cost of capital.
    True
  3. Which is not true about debt financing and the weighted average cost of capital?
    a. debt is usually the cheapest source of financing
    b. as the level of debt increases beyond the optimum capital structure, the cost of capital increases
    c. No debt in the firm's capital structure will minimize the firm's weighted-average cost of capital
    d. none of the above
    c No debt in the firm's capital structure will minimize the firm's weighted-average cost of capital
  4. Most firms are able to use ____ percent debt in their capital structure without exceeding norms acceptable to creditors and investors.
    a. 30-50
    b. 40-60
    c. 50-70
    d. 60-80
    a 30-50
  5. A firm in a cyclical industry should use
    a. a large amount of debt to lower the cost of capital
    b. no debt at all
    c. preferred stock in place of debt
    d. a limited amount of debt to lower the cost of capital
    d a limited amount of debt to lower the cost of capital
  6. Lewis, Schultz and Nobel Development Corp. has an aftertax cost of debt of 6.3 percent. With a tax rate of 30 percent, what is the yield on the debt?
    a. 4.41%
    b. 9.0%
    c. 1.89%
    d. 21%
    b 9.0%
  7. According to traditional financial theory, the cost of capital curve is U-shaped over the range of debt-equity mixes.
    True
  8. The after-tax cost of debt will almost always be below
    a. the before tax cost of debt
    b. the weighted average cost of capital
    c. the cost of equity
    d. all of the above
    d all of the above
  9. Ten years ago, Stigler Company issued $100 par value preferred stock yielding 8 percent. The preferred stock is now selling for $97 per share. What is the

    current yield or cost of the preferred stock? (Disregard flotation costs.)
    a. 7.76%
    b. 8%
    c. 8.25%
    d. there is not enough information to answer the question
    c 8.25%
  10. The coupon rate on a debt issue is 12%. If the yield to maturity on the debt is 9.33%, what is the after-tax cost of existing debt if the firm's tax rate is

    34%?
    a. 3.17%
    b. 4%
    c. 6.16%
    d. 7.92%
    c 6.16%
  11. The cost of debt is equal to the current bond yield on bonds of similar risk class and adjusted for the corporate tax rate.
    True
  12. The only difference in the cost of common stock (Ke) and the cost of new common stock (Kn) is the flotation cost on new common stock.
    True
  13. The component parts of the cost of capital should be weighted by their proportion in the firm's
    a. current capital structure
    b. historical capital structure
    c. optimum capital structure
    d. expected capital structure
    c optimum capital structure
  14. Klein Corp. can issue $1000 par value bond that pays $100 a year in interest at a price of $980. The bond will have a 5-year life. The firm is in a 35% tax

    bracket. What is the aftertax cost of debt?
    a. 9.14%
    b. 9.03%
    c. 5.87%
    d. 6.8%
    d 6.8%
  15. Expected cash dividends are $2.50, the dividend yield is 6%, flotation costs are 4%, and the growth rate is 3%. Compute cost of new common stock.
    a. 9.00%
    b. 9.25%
    c. 9.18%
    d. 9.44%
    b 9.25%
  16. In determining the cost of debt, yields and prices of outstanding bonds are used.
    True
  17. Although the after-tax cost of debt is below the cost of equity, firms cannot increase their use of debt without limit.
    True
  18. If a firm's bonds are currently yielding 8% in the marketplace, why would the firm's cost of debt be lower?
    a. interest rates have changed
    b. additional debt can be issued more cheaply than the original debt
    c. there should be no difference; cost of debt is the same as the bond's market yield
    d. interest is tax-deductible
    d interest is tax-deductible
  19. A firm's stock is selling for $85. The dividend yield is 5%. A 7% growth rate is expected for the common stock. The firm's tax rate is 32%. What is the

    firm's cost of common equity?
    a. 8.16%
    b. 12%
    c. 12.35
    d. can not be determined
    b 12%
  20. In determining the cost of retained earnings
    a. the dividend valuation model is inappropriate
    b. flotation cost are included
    c. growth is not considered
    d. the capital asset pricing model can be used
    d the capital asset pricing model can be used
  21. The coupon rate on a debt issue is 12%. If the yield to maturity on the debt is 9.33%, what is the after-tax cost of existing debt if the firm's tax rate is

    34%?
    a. 3.17%
    b. 4.08%
    c. 6.16%
    d. 7.92%
    c 6.16%
  22. Marginal cost of capital
    a. recognizes that cost of capital does not stay constant as more funds are raised
    b. usually provides the same capital budgeting choices as the use of weighted average cost of capital
    c. can be defined as the cost of capital when no retained earnings are available for expansion
    d. none of the above apply
    a recognizes that cost of capital does not stay constant as more funds are raised
  23. The discount rate that equates a future stream of expected dividends to the current price is a good approximation of the cost of common stock.
    True
  24. A firm that does not earn the cost of capital in the long run will not maximize shareholder wealth.
    True
  25. Companies prefer to maintain some financing flexibility in order to choose the lowest cost source of funds at a single point in time.
    True
  26. A firm's debt to equity ratio varies at times because
    a. a firm will want to sell common stock when prices are high and bonds when interest rates are low
    b. a firm will want to take advantage of timing its fund raising in order to minimize costs over the long run
    c. the market allows some leeway in the debt to equity ratio before penalizing the firm with a higher cost of capital
    d. all of the above are accurate statements
    d all of the above are accurate statements
  27. Although debt financing is usually the cheapest component of capital, it cannot be used to excess because
    a. interest rates may change
    b. the firm's stock price will increase and raise the cost of equity financing
    c. the financial risk of the firm may increase and thus drive up the cost of all sources of financing
    d. underwriting costs may change
    c the financial risk of the firm may increase and thus drive up the cost of all sources of financing
  28. The pre-tax cost of debt for a new issue of debt is determined by
    a. the investor's required rate of return on issued stock
    b. the coupon rate of existing debt
    c. the yield to maturity of outstanding bonds
    d. all of the above
    c the yield to maturity of outstanding bonds
  29. Market values rather than book values should be used for determining the optimal capital structure - though in practice book value is commonly used.
    True

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