FNAN 522 CH 14 FINAL EXAM ACTUAL UPDATED QUESTIONS AND CORRECT
ANSWERS
C
Terms in this set (24)
All else constant, which one of the following will increase E. a reduction in the risk-free rate
a firm's cost of equity if the firm computes that cost using
the security market line approach? Assume the firm
currently pays an annual dividend of $1 a share and has a
beta of 1.2.
A. a reduction in the dividend amount
B. an increase in the dividend amount
C. a reduction in the market rate of return
D. a reduction in the firm's beta E. a reduction in the risk-
free rate
The aftertax cost of debt: E. has a greater effect on a firm's cost of capital when the debt-equity ratio
increases.
A. varies inversely to changes in market interest rates.
B. will generally exceed the cost of equity if the relevant
tax rate is zero.
C. will generally equal the cost of preferred if the tax rate
is zero.
D. is unaffected by changes in the market rate of interest.
E. has a greater effect on a firm's cost of capital when the
debt-equity ratio increases.
, Which one of the following statements is correct for a A. The WACC should decrease as the firm's debt-equity ratio increases.
firm that uses debt in its capital structure?
A. The WACC should decrease as the firm's debt-equity
ratio increases.
B. When computing the WACC, the weight assigned to
the preferred stock is based on the coupon rate
multiplied by the par value of the preferred.
C. The firm's WACC will decrease as the corporate tax
rate decreases.
D. The weight of the common stock used in the
computation of the WACC is based on the number of
shares outstanding multiplied by the book value per
share.
E. The WACC will remain constant unless a firm retires
some of its debt.
Justice, Inc. has a capital structure which is based on 30 D. 9.75 percent
percent debt, 5 percent preferred stock, and 65 percent
common stock. The flotation costs are 11 percent for
common stock, 10 percent for preferred stock, and 7
percent for debt. The corporate tax rate is 37 percent.
What is the weighted average flotation cost?
A. 8.97 percent
B. 9.48 percent
C. 9.62 percent
D. 9.75 percent
E. 10.00 percent
Western Wear is considering a project that requires an A. $280,409
initial investment of $274,000. The firm maintains a debt-
equity ratio of 0.40 and has a flotation cost of debt of 8
percent and a flotation cost of equity of 10.5 percent. The
firm has sufficient internally generated equity to cover
the equity portion of this project. What is the initial cost of
the project including the flotation costs?
A. $280,409
B. $281,406
C. $288,005
D. $297,747
E. $302,762
ANSWERS
C
Terms in this set (24)
All else constant, which one of the following will increase E. a reduction in the risk-free rate
a firm's cost of equity if the firm computes that cost using
the security market line approach? Assume the firm
currently pays an annual dividend of $1 a share and has a
beta of 1.2.
A. a reduction in the dividend amount
B. an increase in the dividend amount
C. a reduction in the market rate of return
D. a reduction in the firm's beta E. a reduction in the risk-
free rate
The aftertax cost of debt: E. has a greater effect on a firm's cost of capital when the debt-equity ratio
increases.
A. varies inversely to changes in market interest rates.
B. will generally exceed the cost of equity if the relevant
tax rate is zero.
C. will generally equal the cost of preferred if the tax rate
is zero.
D. is unaffected by changes in the market rate of interest.
E. has a greater effect on a firm's cost of capital when the
debt-equity ratio increases.
, Which one of the following statements is correct for a A. The WACC should decrease as the firm's debt-equity ratio increases.
firm that uses debt in its capital structure?
A. The WACC should decrease as the firm's debt-equity
ratio increases.
B. When computing the WACC, the weight assigned to
the preferred stock is based on the coupon rate
multiplied by the par value of the preferred.
C. The firm's WACC will decrease as the corporate tax
rate decreases.
D. The weight of the common stock used in the
computation of the WACC is based on the number of
shares outstanding multiplied by the book value per
share.
E. The WACC will remain constant unless a firm retires
some of its debt.
Justice, Inc. has a capital structure which is based on 30 D. 9.75 percent
percent debt, 5 percent preferred stock, and 65 percent
common stock. The flotation costs are 11 percent for
common stock, 10 percent for preferred stock, and 7
percent for debt. The corporate tax rate is 37 percent.
What is the weighted average flotation cost?
A. 8.97 percent
B. 9.48 percent
C. 9.62 percent
D. 9.75 percent
E. 10.00 percent
Western Wear is considering a project that requires an A. $280,409
initial investment of $274,000. The firm maintains a debt-
equity ratio of 0.40 and has a flotation cost of debt of 8
percent and a flotation cost of equity of 10.5 percent. The
firm has sufficient internally generated equity to cover
the equity portion of this project. What is the initial cost of
the project including the flotation costs?
A. $280,409
B. $281,406
C. $288,005
D. $297,747
E. $302,762
