CORP 2 - Chapter 11 Flashcards by Matt Morales

A firm's bond have a coupon rate of 8.80%. They currently have a yield-to-maturity of 9.75%. if the firm's tax rate is 25%, its after-tax cost of debt is \_\_\_\_\_\_\_.
A. 9.75%
B. 2.44%
C. 7.31%
D. 8.80%

A firm’s bond have a coupon rate of 8.80%. They currently have a yield-to-maturity of 9.75%. if the firm’s tax rate is 25%, its after-tax cost of debt is _______.

C. 7.31%

How well did you know this?

Not at all

Perfectly

You have determined that a stock has a required rate of return of 18%. If the market risk premium is 10.50%, and the 91 day t-bill is yielding 2.50%, what is the stock's Beta?
A. 1.00
B. 2.00
C. 1.48
D. .95

You have determined that a stock has a required rate of return of 18%. If the market risk premium is 10.50%, and the 91 day t-bill is yielding 2.50%, what is the stock’s Beta?

C. 1.48

How well did you know this?

Not at all

Perfectly

Micro Brew (MB) is considering issuing new common stock. MB currently trades at $32.50 a share and MB's investment bankers estimate that it will cost $2.30 a share to issue new common stock. What is MB's estimated cost of new common shares, if the firm's cost of retained earnings is 12%?
A. 8.50%
B. 12.75%
C. 13.02%
D. 15.00%

Micro Brew (MB) is considering issuing new common stock. MB currently trades at $32.50 a share and MB’s investment bankers estimate that it will cost $2.30 a share to issue new common stock. What is MB’s estimated cost of new common shares, if the firm’s cost of retained earnings is 12%?

C. 13.02%

How well did you know this?

Not at all

Perfectly

Figs, Dates and other things (FDT)

How well did you know this?

Not at all

Perfectly

Wonder Warp Corp

How well did you know this?

Not at all

Perfectly

A firm can issue $1,000 par value bond that pays $90 per year in interest at a price of $950. The bond will have a 10-year life. The firm is in a 35% tax bracket. What is the after tax cost of debt?
A. 9.81%
B. 10.20%
C. 6.37%
D. 6.50%

A firm can issue $1,000 par value bond that pays $90 per year in interest at a price of $950. The bond will have a 10-year life. The firm is in a 35% tax bracket. What is the after tax cost of debt?

C. 6.37%

How well did you know this?

Not at all

Perfectly

The weighted average cost of capital for Patrick Corp. is currently 10%. Patrick Corp. is considering a new project but must raise new debt to finance the project. Debt represents 25% of the capital structure. If the after tax cost of debt will rise from 6% to 10%, what is the marginal cost of capital?
A. 10.25%
B. 10.75%
C. 11.00%
D. not enough information to answer the question

C. 11.00%

How well did you know this?

Not at all

Perfectly

The coupon rate on a debt issue is 13%. If the yield to maturity on the debt is 10%, what is the after tax cost of debt (for a cost of capital calculation) if the firm's tax rate is 34%?
A. 4.42%
B. 3.00%
C. 8.58%
D. 6.60%

The coupon rate on a debt issue is 13%. If the yield to maturity on the debt is 10%, what is the after tax cost of debt (for a cost of capital calculation) if the firm’s tax rate is 34%?

D. 6.60%

How well did you know this?

Not at all

Perfectly

A firm is paying an annual dividend of $2.50 for its preferred stock which is selling for $50.00. There is a selling cost of $4.00. What is the after tax cost of preferred stock if the firm's tax rate is 33%?
A. 5.00%
B. 8.00%
C. 5.43%
D. 6.20%

A firm is paying an annual dividend of $2.50 for its preferred stock which is selling for $50.00. There is a selling cost of $4.00. What is the after tax cost of preferred stock if the firm’s tax rate is 33%?

C. 5.43%

How well did you know this?

Not at all

Perfectly

Morgan Corporation has 60% of its capital structure in the form of equity capital. $200,000 in capital needs to be raised for a project but only $50,000 in funds is available through retained earnings. How much must be raised through common stock to maintain Morgan Corporation's capital structure?
A. $70,000
B. $50,000
C. $120,000
D. $90,000

Morgan Corporation has 60% of its capital structure in the form of equity capital. $200,000 in capital needs to be raised for a project but only $50,000 in funds is available through retained earnings. How much must be raised through common stock to maintain Morgan Corporation’s capital structure?

A. $70,000

How well did you know this?

Not at all

Perfectly

Expected cash dividends are $4.50, the dividend yield is 8%, flotation costs are 5%, and the growth rate is 4%. Compute cost of the new common stock.
A. 12.63%
B. 8.42%
C. 4.21%
D. not enough information to calculate the cost.

Expected cash dividends are $4.50, the dividend yield is 8%, flotation costs are 5%, and the growth rate is 4%. Compute cost of the new common stock.

A. 12.63%

How well did you know this?

Not at all

Perfectly

A firm’s debt to equity ratio varies at times because
A. a firm will want to sell common stock when prices are low and bond when interest rates are high.
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 extensive leeway in the debt to equity ratio before penalizing the firm with a higher cost of capital.
D. all of the other answers are correct

A firm’s debt to equity ratio varies at times because

B. a firm will want to take advantage of timing its fund raising in order to minimize costs over the long run.

How well did you know this?

Not at all

Perfectly

Use of the marginal cost of capital
A. acknowledges that when retained earnings is used up as a source of equity the cost of
capital decreases as new common stock is sold to support more growth.
B. recognizes that the return from the last dollar of funds generated should be less than the
cost of the last dollar of funds raised.
C. two of the other answers are correct
D. none of the other answers are correct

Use of the marginal cost of capital

D. none of the other answers are correct

How well did you know this?

Not at all

Perfectly

The after tax cost of preferred stock to the issuing corporation
A. is lower than the before-tax cost.
B. is usually lower than the cost of debt.
C. is dependent on the firm’s tax bracket.
D. none of the above

The after tax cost of preferred stock to the issuing corporation

D. none of the above

How well did you know this?

Not at all

Perfectly

For a firm paying 7% for new debt, the lower the firm’s tax rate
A. the higher the after tax cost of debt.
B. the lower the after tax cost of debt.
C. after tax cost is unchanged.
D. not enough information to judge

For a firm paying 7% for new debt, the lower the firm’s tax rate

A. the higher the after tax cost of debt.

How well did you know this?

Not at all

Perfectly

Each project should be judged against
A. the specific means of financing used to support its implementation.
B. the going interest rate at that point in time.
C. the cost of new common stock equity.
D. the weighted average cost of capital

Each project should be judged against

D. the weighted average cost of capital

How well did you know this?

Not at all

Perfectly

When both the tax deductibility of debt and the present value of potential bankruptcy costs are included, the cost of capital for a firm tends to
A. be constant regardless of the level of debt usage.
B. decrease as the level of debt increases.
C. increase as the level of debt increases.
D. decrease up to some debt-value ratio, then increase as bankruptcy costs become
significant.

When both the tax deductibility of debt and the present value of potential bankruptcy costs are included, the cost of capital for a firm tends to

D. decrease up to some debt-value ratio, then increase as bankruptcy costs become
significant.

How well did you know this?

Not at all

Perfectly

Modigliani and Miller’s analysis of the tax deductible nature of debt suggested that firm value would
A. decrease as the firm’s use of debt increased.
B. increase as the firm’s use of debt increased.
C. be unrelated to the firm’s use of debt.
D. be unrelated to earnings before taxes and interest on the firm’s debt.

Modigliani and Miller’s analysis of the tax deductible nature of debt suggested that firm value would

B. increase as the firm’s use of debt increased.

How well did you know this?

Not at all

Perfectly

According to the original approach of Modigliani and Miller (M&M), a firm’s value is
A. unaffected by its capital structure.
B. positively related to its use of debt.
C. negatively related to its use of debt.
D. positively related to its use of debt, but only up to some maximum debt/equity mix.

According to the original approach of Modigliani and Miller (M&M), a firm’s value is

A. unaffected by its capital structure.

How well did you know this?

Not at all

Perfectly

In the Net Operating Income approach to cost-of-capital analysis, a firm’s value depends on
A. its net operating income.
B. its use of debt.
C. size of the firm.
D. retained earnings as a proportion of debt.

In the Net Operating Income approach to cost-of-capital analysis, a firm’s value depends on

A. its net operating income.

How well did you know this?

Not at all

Perfectly

Under the traditional approach to cost-of-capital analysis suggested by Durand, a firm’s value
A. remains the same, regardless of the amount of debt used.
B. increases as more debt is used.
C. decreases as more debt is used.
D. is at its maximum when the weighted average cost of capital is minimized.

Under the traditional approach to cost-of-capital analysis suggested by Durand, a firm’s value

D. is at its maximum when the weighted average cost of capital is minimized.

How well did you know this?

Not at all

Perfectly

The required rate of return for a stock which has 1.5 times the risk of the market in general will be
A. 1.5 times the risk-free rate.
B. 1.5 times the market rate of return.
C. 1.5 times the market risk premium, plus the risk-free rate.
D. 1.5 times the risk-free rate, plus the market risk premium.

The required rate of return for a stock which has 1.5 times the risk of the market in general will be

C. 1.5 times the market risk premium, plus the risk-free rate.

How well did you know this?

Not at all

Perfectly

The difference between the return on the market and the risk-free return in the Capital Asset Pricing Model is known
A. as the market return.
B. as the market risk premium.
C. as the risk-free rate of return.
D. as the security market return.

The difference between the return on the market and the risk-free return in the Capital Asset Pricing Model is known

B. as the market risk premium.

How well did you know this?

Not at all

Perfectly

A reduction in the willingness of investors to take on risk would have what effect on the
Security Market Line?
A. no effect
B. rotate the SML counter clockwise around the risk-free rate
C. rotate the SML clockwise around the risk-free rate
D. shift the SML upward, parallel to its previous location

A reduction in the willingness of investors to take on risk would have what effect on the
Security Market Line?

B. rotate the SML counter clockwise around the risk-free rate

How well did you know this?

Not at all

Perfectly

``` The difference between the return on the market and the risk-free return in the Capital Asset Pricing Model is known A. as the market return. B. as the market risk premium. C. as the risk-free rate of return. D. as the security market return. ```

The difference between the return on the market and the risk-free return in the Capital Asset Pricing Model is known B. as the market risk premium.

A reduction in the willingness of investors to take on risk would have what effect on the Security Market Line? A. no effect B. rotate the SML counter clockwise around the risk-free rate C. rotate the SML clockwise around the risk-free rate D. shift the SML upward, parallel to its previous location

A reduction in the willingness of investors to take on risk would have what effect on the Security Market Line? B. rotate the SML counter clockwise around the risk-free rate

The capital asset pricing model A. expresses a linear relationship between returns on individual stocks and the market over time. B. can be used to examine common stock returns but not the risk of the stock. C. is not very useful because it is unrealistically a linear model. D. all of the other answers are correct

The capital asset pricing model A. expresses a linear relationship between returns on individual stocks and the market over time.

As investors become more pessimistic (risk averse) A. they require smaller premiums for taking risk. B. they require larger premiums for taking risk. C. prices of securities fall in order to raise their expected rate of return. D. two of the other answers are correct

As investors become more pessimistic (risk averse) D. two of the other answers are correct

The risk-free rate of interest A. is independent of market rates of returns on short-term securities. B. can be thought of as a real rate of interest on a short-term riskless government security. C. is influenced by the treasury bill's beta. D. all of the other answers are correct

The risk-free rate of interest B. can be thought of as a real rate of interest on a short-term riskless government security.

Analysis of returns using the SML would indicate that A. as betas increase, so does the expected return. B. the required return for all securities can be expressed as the risk free rate plus a premium for risk. C. if the beta is 2.0, twice the market risk premium must be earned. D. all of the other answers are correct

Analysis of returns using the SML would indicate that D. all of the other answers are correct

If the investor desires less risk than the market, he or she A. buys stocks with alphas of zero. B. buys stocks with betas less than 1.0. C. makes sure the risk-free rate is higher than the expected market return. D. buys stocks only when the slope of the security market line is on a 45 degree angle.

If the investor desires less risk than the market, he or she B. buys stocks with betas less than 1.0.

In the equation Kj = Rf + ßj (Rm - Rf), A. beta (ßj) is the stock's measure of volatility relative to the market. B. Rm - Rf is the premium or excess return of the market versus the risk free rate. C. ßj (Rm - Rf) is the expected return above the risk-free rate for the stock of company j. D. all of the other answers are correct

In the equation Kj = Rf + ßj (Rm - Rf), D. all of the other answers are correct

In the equation Kj = Rf + ßj (Rm - Rf), A. Rf is the return expected in the future. B. Rf is the return expected on a corporate AAA bond. C. Rf is the risk free rate of interest represented by a Canadian government treasury bill. D. Rf is a risk premium expected over the market return.

In the equation Kj = Rf + ßj (Rm - Rf), C. Rf is the risk free rate of interest represented by a Canadian government treasury bill.

The Security Market Line (SML) A. shows the relationship between a stock return and the market return but ignores risk. B. shows the relationship between risk and return. C. uses the AAA corporate bond rate for a riskless rate of return. D. none of the other answers are correct

The Security Market Line (SML) B. shows the relationship between risk and return.

In the equation Kj = a + ßj Rm + e, A. beta (ß) is a stock's measure of volatility (risk) relative to the market. B. beta is the stock's expected return. C. beta is the market's adjusted return. D. beta is an accurate predictor of one stock's future risk.

In the equation Kj = a + ßj Rm + e, A. beta (ß) is a stock's measure of volatility (risk) relative to the market.

Retained earnings has a cost associated with it because A. new funds must be raised. B. there is an opportunity cost associated with shareholder funds. C. Ke > g. D. flotation costs increase the cost of funding.

Retained earnings has a cost associated with it because B. there is an opportunity cost associated with shareholder funds.

Why is the cost of debt normally lower than the cost of preferred shares? A. preferred share dividends are tax deductions B. interest is tax deductible C. preferred share dividends must be paid before common share dividends D. common share dividends are not tax deductible

Why is the cost of debt normally lower than the cost of preferred shares? B. interest is tax deductible

``` Financial capital does not include A. common equity capital. B. bonds. C. preferred shares. D. working capital ```

Financial capital does not include D. working capital

There may be a change in the marginal cost of capital curve because A. the tax rate charged to investors changes. B. the firm has exhausted its supply of retained earnings. C. the firm is limited in the amount of amortization it can take. D. two of the answers are correct.

There may be a change in the marginal cost of capital curve because B. the firm has exhausted its supply of retained earnings.

``` Most firms are able to use _________ percent debt in their capital structure without exceeding norms acceptable to creditors and investors. A. 20-50 B. 30-60 C. 40-70 D. 50-80 ```

Most firms are able to use _________ percent debt in their capital structure without exceeding norms acceptable to creditors and investors. C. 40-70

``` If the flotation cost goes up, the cost of retained earnings will A. go up. B. go down. C. stay the same. D. slowly increase. ```

If the flotation cost goes up, the cost of retained earnings will C. stay the same.

``` In computing the cost of common equity, if D1 goes downward and Po goes up, Ke will A. go up. B. go down. C. stay the same. D. slowly increase. ```

In computing the cost of common equity, if D1 goes downward and Po goes up, Ke will B. go down.

``` A firm can issue $1,000 par value bond that pays $100 per 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 after tax cost of debt? A. 10.53% B. 10.20% C. 6.85% D. 6.50% ```

A firm can issue $1,000 par value bond that pays $100 per 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 after tax cost of debt? C. 6.85%

``` For many firms, the cheapest and most important source of equity capital is in the form of A. debt. B. common stock. C. preferred stock. D. retained earnings. ```

For many firms, the cheapest and most important source of equity capital is in the form of D. retained earnings.

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 equal to or less than the WACC. D. positive rates of return.

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.

The optimal capital structure for firms in cyclical industries should contain ________________ than firms in stable industries. A. more debt B. less debt C. an equal amount of debt D. none of the above. There is no relationship between the cyclical nature of an industry and optimal capital structure.

The optimal capital structure for firms in cyclical industries should contain ________________ than firms in stable industries. B. less debt

``` The after tax cost of debt will 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 ```

The after tax cost of debt will always be below D. all of the above

The cost of equity capital in the form of new common stock will be higher than the cost of retained earnings because of A. the existence of taxes. B. the existence of flotation costs. C. investors' unwillingness to purchase additional shares of common stock. D. the existence of financial leverage.

The cost of equity capital in the form of new common stock will be higher than the cost of retained earnings because of B. the existence of flotation costs.

A firm's cost of financing, in an overall sense, is equal to its A. weighted average cost of capital. B. required yield that investors seek for various kinds of securities. C. required rate of return that investors seek for various kinds of securities. D. all of the above

A firm's cost of financing, in an overall sense, is equal to its D. all of the above

``` Firm X has a tax rate of 30%. The price of its new preferred stock is $63 and its flotation cost is $3.15. The cost of new preferred stock is 12%. What is the firm's dividend? A. $7.18 B. $5.03 C. $7.56 D. none of the above ```

Firm X has a tax rate of 30%. The price of its new preferred stock is $63 and its flotation cost is $3.15. The cost of new preferred stock is 12%. What is the firm's dividend? A. $7.18

``` The weighted average cost of capital for firm X is currently 10%. Firm X is considering a new project but must raise new debt to finance the project. Debt represents 25% of the capital structure. If the after tax cost of debt will rise from 7% to 8%, what is the marginal cost of capital? A. 10.25% B. 10.75% C. 12.00% D. not enough information ```

The weighted average cost of capital for firm X is currently 10%. Firm X is considering a new project but must raise new debt to finance the project. Debt represents 25% of the capital structure. If the after tax cost of debt will rise from 7% to 8%, what is the marginal cost of capital? A. 10.25%

``` A firm's stock is selling for $78. The next annual dividend is expected to be $2.34. The growth rate is 9%. The flotation cost is $5.00. What is the cost of retained earnings? A. 12.82% B. 12.21% C. 12.00% D. 9.41% ```

A firm's stock is selling for $78. The next annual dividend is expected to be $2.34. The growth rate is 9%. The flotation cost is $5.00. What is the cost of retained earnings? C. 12.00%

``` 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. 12.00% C. 12.35% D. 10.40% ```

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? B. 12.00%

``` The coupon rate on an issue of debt is 12%. The yield to maturity on this issue is 14%. The corporate tax rate is 31%. What would be the approximate after tax cost of debt for a new issue of bonds? A. 4.34% B. 3.72% C. 9.66% D. 8.28% ```

The coupon rate on an issue of debt is 12%. The yield to maturity on this issue is 14%. The corporate tax rate is 31%. What would be the approximate after tax cost of debt for a new issue of bonds? C. 9.66%

``` 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 debt (for a cost of capital calculation) if the firm's tax rate is 34%? A. 3.17% B. 4.08% C. 6.16% D. 7.92% ```

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 debt (for a cost of capital calculation) if the firm's tax rate is 34%? C. 6.16%

``` A firm is paying an annual dividend of $3.63 for its preferred stock which is selling for $62.70. There is a selling cost of $3.30. What is the after tax cost of preferred stock if the firm's tax rate is 33%? A. 2.02% B. 4.09% C. 5.79% D. 6.11% ```

A firm is paying an annual dividend of $3.63 for its preferred stock which is selling for $62.70. There is a selling cost of $3.30. What is the after tax cost of preferred stock if the firm's tax rate is 33%? D. 6.11%

``` The Halifax Corporation has 70% of its capital structure in the form of equity capital. $150,000 in capital needs to be raised for a project but only $30,000 in funds is available through retained earnings. How much must be raised through common stock to maintain Halifax Corporation's capital structure? A. $105,000 B. $75,000 C. $120,000 D. $21,000 ```

The Halifax Corporation has 70% of its capital structure in the form of equity capital. $150,000 in capital needs to be raised for a project but only $30,000 in funds is available through retained earnings. How much must be raised through common stock to maintain Halifax Corporation's capital structure? B. $75,000

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. none of the other answers are correct.

The pre-tax cost of debt for a new issue of debt is determined by C. the yield to maturity of outstanding bonds.

Within the capital asset pricing model A. the risk-free rate is usually higher than the return in the market. B. the higher the beta the lower the required rate of return. C. beta measures the volatility of an individual stock relative to a stock market index. D. two of the answers are correct

Within the capital asset pricing model C. beta measures the volatility of an individual stock relative to a stock market index.

In determining the cost of retained earnings A. the dividend valuation model is inappropriate. B. flotation costs are included. C. growth is not considered. D. the capital asset pricing model can be used.

In determining the cost of retained earnings D. the capital asset pricing model can be used.

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 other answers are correct

Which is not true about debt financing and the weighted average cost of capital? C. no debt in the firm's capital structure will minimize the firm's weighted-average cost of capital

The cost of debt is determined by taking the A. present value of the interest payments and principal times one minus the tax rate. B. historical yield on bonds times one minus the tax rate C. estimated yield on new bond issues of the same risk times one minus the shareholder marginal tax rate. D. none of the other answers are correct.

The cost of debt is determined by taking the D. none of the other answers are correct.

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

Marginal cost of capital A. recognizes that cost of capital does not stay constant as more funds are raised.

``` Expected cash dividends are $2.50, the dividend yield is 6%, flotation costs are 4%, and the growth rate is 3%. Compute cost of the new common stock. A. 9.00% B. 9.25% C. 9.18% D. 9.375% ```

Expected cash dividends are $2.50, the dividend yield is 6%, flotation costs are 4%, and the growth rate is 3%. Compute cost of the new common stock. D. 9.375%

New common stock is more expensive than ke A. to compensate for risk. B. to compensate for more dividends. C. to compensate for expansionary problems. D. to cover distribution costs.

New common stock is more expensive than ke D. to cover distribution costs.

``` Using the constant dividend growth model for common stock, if Po goes up A. the assumed cost goes up. B. the assumed cost goes down. C. the assumed cost remains unchanged. D. need further information ```

Using the constant dividend growth model for common stock, if Po goes up B. the assumed cost goes down.

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 bond 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 other answers are correct.

A firm's debt to equity ratio varies at times because D. all of the other answers are correct.

The overall weighted average cost of capital is used instead of costs for specific sources of funds because A. use of the cost for specific sources of capital would make investment decisions inconsistent. B. a project with the highest return would always be accepted under the specific cost criteria. C. investments funded by low cost debt would have an advantage over other investments. D. two of the other answers are correct.

The overall weighted average cost of capital is used instead of costs for specific sources of funds because D. two of the other answers are correct.

Use of the marginal cost of capital A. acknowledges that when retained earnings is used up as a source of equity the cost of capital rises as new common stock is sold to support more growth. B. recognizes that the return from the last dollar of funds generated should be equal to the cost of the last dollar of funds raised. C. two of the other answers are correct. D. none of the other answers are correct.

Use of the marginal cost of capital C. two of the other answers are correct.

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.

A firm in a cyclical industry should use D. a limited amount of debt to lower the cost of capital.

The after tax cost of preferred stock to the issuing corporation A. is the same as the before-tax cost. B. is usually lower than the cost of debt. C. is dependent on the firm's tax bracket. D. none of the above

The after tax cost of preferred stock to the issuing corporation A. is the same as the before-tax cost.

For a firm paying 7% for new debt, the higher the firm's tax rate A. the higher the after tax cost of debt. B. the lower the after tax cost of debt. C. after tax cost is unchanged. D. not enough information to judge

For a firm paying 7% for new debt, the higher the firm's tax rate B. the lower the after tax cost of debt.

Each project should be judged against A. the specific means of financing used to support its implementation. B. the going interest rate at that point in time. C. the cost of new common stock equity. D. none of the above

Each project should be judged against D. none of the above

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 share 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.

Although debt financing is usually the cheapest component of capital, it cannot be used to excess because C. the financial risk of the firm may increase and thus drive up the cost of all sources of financing.

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

If a firm's bonds are currently yielding 8% in the marketplace, why would the firm's cost of debt be lower? D. interest is tax-deductible

``` 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. ```

The component parts of the cost of capital should be weighted by their proportion in the firm's C. optimum capital structure.

The weighted average cost of capital is used as a discount rate because A. it is an indication of how much the firm is earning overall. B. as long as the cost of capital is earned, the common stock value of the firm will be maintained. C. it is comparable to the prevailing market interest rates. D. returns below the cost of capital will cover all fixed costs associated with capital and provide an excess return to shareholders.

The weighted average cost of capital is used as a discount rate because B. as long as the cost of capital is earned, the common stock value of the firm will be maintained.

CORP 2 - Chapter 11 Flashcards

(77 cards)