Ch.11 Calculating the Cost of Capital Full Test Bank

Finance, 5e (Cornett)

Chapter 11 Calculating the Cost of Capital

1) When calculating the weighted average cost of capital, weights are based on

A) book values.

B) book weights.

C) market values.

D) market betas.

2) Which of these completes this statement to make it true? The constant growth model is

A) always going to have assumptions that will hold true.

B) adjustable for stocks that don't expect constant growth without sizeable errors.

C) only going to be appropriate for the limited number of stocks that just happen to expect constant growth.

D) only going to be appropriate for the limited number of stocks that just happen to expect nonconstant growth.

3) When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm's cash flows as

A) a simple average of the capital components costs.

B) a sum of the capital components costs.

C) a weighted average of the capital components costs.

D) they apply to each asset as they are purchased with their respective forms of debt or equity.

4) Which of the following is a true statement?

A) To estimate the before-tax cost of debt, we need to solve for the Yield to Maturity (YTM) on the firm's existing debt.

B) To estimate the before-tax cost of debt, we need to solve for the Yield to Call (YTC) on the firm's existing debt.

C) To estimate the before-tax cost of debt, we use the coupon rate on the firm's existing debt.

D) To estimate the before-tax cost of debt, we use the average rate on the firm's existing debt.

5) Which of the following is a true statement regarding the appropriate tax rate to be used in the WACC?

A) One would use the marginal tax rate that the firm paid the prior year.

B) One would use the average tax rate that the firm paid the prior year.

C) One would use the weighted average of the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction.

D) One would use the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction.

6) Which of these statements is true regarding calculating weights for WACC?

A) If we are calculating WACC for the firm, then equity, preferred stock and debt would be the entire book value of each source of capital.

B) If we are calculating WACC for the firm, then equity, preferred stock and debt would be the entire market value of each source of capital.

C) If we are calculating WACC for a project, then equity, preferred stock and debt would be the entire book value of each source of capital.

D) If we are calculating WACC for a project, then equity, preferred stock and debt would be the entire market value of each source of capital.

7) Which of the following statements is true?

A) If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital.

B) If the new project is riskier than the firm's existing projects, then it should be charged a lower cost of capital.

C) If the new project is riskier than the firm's existing projects, then it should be charged the firm's cost of capital.

D) The new project's risk is not a factor in determining its cost of capital.

8) Which of the following makes this a true statement? If the new project does significantly increase the firm's overall risk

A) the increased risk will be borne equally amongst the bondholders, preferred stockholders, and common stockholders.

B) the increased risk will be borne disproportionately by bondholders.

C) the increased risk will be borne disproportionately by preferred stockholders.

D) the increased risk will be borne disproportionately by common stockholders.

9) An average of which of the following will give a fairly accurate estimate of what a project's beta will be?

A) flotation beta

B) proxy beta

C) pure-play proxies

D) weighted average beta

10) Which of the following makes this a true statement? Ideally, when searching for a beta for a new line of business

A) one could find other firms engaged in the proposed new line of business and use their betas as proxies to estimate the project's risk.

B) one would like to find at least three or four pure-play proxies.

C) two (or even one) proxies might represent a suitable sample if their line of business resembles the proposed new project closely enough.

D) All of these choices are correct.

11) Which of these is an estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division?

A) average WACC

B) divisional WACC

C) proxy WACC

D) pure-play WACC

12) Which of these statements is true regarding divisional WACC?

A) Using a divisional WACC versus a WACC for the firm's current operations will result in quite a few incorrect decisions.

B) Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present more risk than the firm's average beta.

C) Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present less risk than the firm's average beta.

D) Using a firmwide WACC to evaluate new projects would have no impact on projects that present less risk than the firm's average beta.

13) An objective approach to calculating divisional WACCs would be done by

A) simply considering the project's risk relative to the firm's lines of business and adjusting upward or downward to account for subjective opinions of project risk.

B) computing the average beta for the firm, the firm's CAPM formula, and the firm's WACC.

C) computing the average beta per division, using these figures for each division in the CAPM formula, and then constructing divisional WACCs.

D) simply averaging out all the WACCs for all the firm's projects.

14) Which statement makes this a false statement? When a firm pays commissions to underwriting firms that float the issuance of new stock

A) the component cost will need to be integrated to figure project WACCs.

B) the component cost will need to be integrated only for the firm's WACC.

C) the firm can increase the project's WACC to incorporate the flotation costs' impact.

D) the firm can leave the WACC alone and adjust the project's initial investment upwards.

15) Which of the following is a principle of capital budgeting which states that the calculations of cash flows should remain independent of financing?

A) generally accepted accounting principle

B) financing principle

C) separation principle

D) WACC principle

16) When we adjust the WACC to reflect flotation costs, this approach

A) raises each capital source's effective cost.

B) raises only the cost of external equity.

C) reduces the cost of debt.

D) reduces each capital source's effective cost.

17) Which of these makes this a true statement? The WACC formula

A) is not impacted by taxes.

B) uses the after-tax costs of capital to compute the firm's weighted average cost of debt financing.

C) uses the pre-tax costs of capital to compute the firm's weighted average cost of debt financing.

D) focuses on operating costs only to keep them separate from financing costs.

18) Which of these makes this a true statement? When determining the appropriate weights used in calculating a WACC, it should reflect

A) the relative sizes of the total book capitalizations for each kind of security that the firm issues.

B) the relative sizes of the total market capitalizations for each kind of security that the firm issues.

C) only the market after-tax cost of debt.

D) only the market after-tax cost of equity.

19) Any debt and preferred stock components of capital should

A) use project-specific, not firmwide, WACC figures.

B) use firmwide, not project-specific, WACC figures.

C) use project-specific figures.

D) not be issued.

20) Which of these are fees paid by firms to investment bankers for issuing new securities?

A) flotation costs

B) interest expense

C) seller financing charges

D) user fees

21) FlavR Co. stock has a beta of 2.0, the current risk-free rate is 2, and the expected return on the market is 9 percent. What is FlavR Co's cost of equity?

A) 11 percent

B) 13 percent

C) 16 percent

D) 20 percent

22) TJ Co. stock has a beta of 1.45, the current risk-free rate is 5.75, and the expected return on the market is 14 percent. What is TJ Co's cost of equity?

A) 17.71 percent

B) 21.20 percent

C) 26.05 percent

D) 28.64 percent

23) CJ Co. stock has a beta of 0.9, the current risk-free rate is 5.6, and the expected return on the market is 13 percent. What is CJ Co's cost of equity?

A) 12.26 percent

B) 17.30 percent

C) 19.50 percent

D) 22.34 percent

24) WC Inc. has a $10 million (face value), 10-year bond issue selling for 99 percent of par that pays an annual coupon of 9 percent. What would be WC's before-tax component cost of debt?

A) 9.00 percent

B) 9.10 percent

C) 9.16 percent

D) 18.32 percent

25) IVY has preferred stock selling for 98 percent of par that pays a 7 percent annual coupon. What would be IVY's component cost of preferred stock?

A) 6.86 percent

B) 7.00 percent

C) 7.14 percent

D) 14.00 percent

26) Fern has preferred stock selling for 95 percent of par that pays an 8 percent annual coupon. What would be Fern's component cost of preferred stock?

A) 7.60 percent

B) 8.00 percent

C) 8.42 percent

D) 9.00 percent

27) Rose has preferred stock selling for 99 percent of par that pays a 9 percent annual coupon. What would be Rose's component cost of preferred stock?

A) 4.55 percent

B) 8.91 percent

C) 9.00 percent

D) 9.09 percent

28) Sports Corp. has 10 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 1 million bonds. If the common shares are selling for $25 per share, the preferred shares are selling for $12.50 per share, and the bonds are selling for 97 percent of par, what would be the weight used for common stock in the computation of Sports' WACC?

A) 18.59 percent

B) 19.49 percent

C) 62.50 percent

D) 79.75 percent

29) JackITs has 5 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 20 thousand bonds. If the common shares are selling for $28 per share, the preferred shares are selling for $13.50 per share, and the bonds are selling for 98 percent of par, what would be the weight used for common stock in the computation of JackITs' WACC?

A) 33.33 percent

B) 80.88 percent

C) 83.08 percent

D) 91.19 percent

30) Carrie D's has 6 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $15 per share, the preferred shares are selling for $28 per share, and the bonds are selling for 109 percent of par, what would be the weight used for common stock in the computation of Carrie D's WACC?

A) 33.33 percent

B) 57.36 percent

C) 61.64 percent

D) 75.00 percent

31) Solar Shades has 8 million shares of common stock outstanding, 4 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $13 per share, the preferred shares are selling for $30 per share, and the bonds are selling for 105 percent of par, what would be the weight used for common stock in the computation of Solar Shades' WACC?

A) 33.33 percent

B) 44.35 percent

C) 46.42 percent

D) 66.61 percent

32) TellAll has 10 million shares of common stock outstanding, 20 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $32 per share, the preferred shares are selling for $20 per share, and the bonds are selling for 106 percent of par, what would be the weight used for preferred stock in the computation of TellAll's WACC?

A) 33.33 percent

B) 48.43 percent

C) 55.55 percent

D) 66.45 percent

33) Paper Exchange has 80 million shares of common stock outstanding, 60 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $20 per share, the preferred shares are selling for $10 per share, and the bonds are selling for 105 percent of par, what would be the weight used for preferred stock in the computation of Paper's WACC?

A) 26.64 percent

B) 27.27 percent

C) 33.33 percent

D) 42.84 percent

34) Town Crier has 10 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $28 per share, the preferred shares are selling for $15.50 per share, and the bonds are selling for 97 percent of par, what would be the weight used for debt in the computation of Town Crier's WACC?

A) 3.02 percent

B) 3.12 percent

C) 3.20 percent

D) 3.33 percent

35) Bill's Boards has 20 million shares of common stock outstanding, 4 million shares of preferred stock outstanding, and 20 thousand bonds. If the common shares are selling for $30 per share, the preferred shares are selling for $17 per share, and the bonds are selling for 96 percent of par, what would be the weight used for debt in the computation of Bill's WACC?

A) 0.83 percent

B) 2.79 percent

C) 2.87 percent

D) 3.33 percent

36) Suppose that TipsNToes, Inc.'s capital structure features 40 percent equity, 60 percent debt, and that its before-tax cost of debt is 9 percent, while its cost of equity is 15 percent. If the appropriate weighted average tax rate is 21 percent, what will be TipsNToes' WACC?

A) 9.36 percent

B) 10.27 percent

C) 11.84 percent

D) 24.00 percent

37) Suppose that Model Nails, Inc.'s capital structure features 60 percent equity, 40 percent debt, and that its before-tax cost of debt is 6 percent, while its cost of equity is 10 percent. If the appropriate weighted average tax rate is 21 percent, what will be Model Nails' WACC?

A) 7.90 percent

B) 6.84 percent

C) 8.40 percent

D) 16.00 percent

38) Suppose that Hanna Nails, Inc.'s capital structure features 45 percent equity, 55 percent debt, and that its before-tax cost of debt is 5 percent, while its cost of equity is 9 percent. If the appropriate weighted average tax rate is 21 percent, what will be Hanna Nails' WACC?

A) 5.18 percent

B) 6.22 percent

C) 6.72 percent

D) 6.80 percent

39) Suppose that Glamour Nails, Inc.'s capital structure features 30 percent equity, 70 percent debt, and that its after-tax cost of debt is 4 percent, while its cost of equity is 10 percent. If the appropriate weighted average tax rate is 21 percent, what will be Glamour Nails' WACC?

A) 4.78 percent

B) 5.80 percent

C) 7.94 percent

D) 7.00 percent

40) TJ Industries has 7 million shares of common stock outstanding with a market price of $20.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 100,000 bonds outstanding, each with face value $1,000 and selling at 95 percent of par value. The cost of common stock is 12 percent, the cost of preferred stock is 10 percent, and the cost of debt is 6.45 percent. All costs are given at the before-tax level. If TJ's tax rate is 21 percent, what is the WACC?

A) 9.24 percent

B) 9.77 percent

C) 12.59 percent

D) 8.44 percent

41) PNB Industries has 20 million shares of common stock outstanding with a market price of $18.00 per share. The company also has outstanding preferred stock with a market value of $50 million, and 500,000 bonds outstanding, each with face value $1,000 and selling at 104 percent of par value. The cost of common stock is 15 percent, the cost of preferred stock is 12 percent, and the cost of debt is 8.50 percent. All costs are given at the before-tax level. If PNB's tax rate is 21 percent, what is the WACC?

A) 7.05 percent

B) 10.21 percent

C) 8.85 percent

D) 11.83 percent

42) PAW Industries has 5 million shares of common stock outstanding with a market price of $8.00 per share and par value of $1 per share. The company also has outstanding preferred stock with a market value of $10 million, and 100,000 bonds outstanding, each with face value $1,000 and selling at 96 percent of par value. The cost of common stock is 19 percent, the cost of preferred stock is 15 percent, and the cost of debt is 9 percent. All costs are given at the before-tax level. If PAW's tax rate is 21 percent, what is the WACC?

A) 10.91 percent

B) 10.38 percent

C) 12.51 percent

D) 14.33 percent

43) Suppose that TW, Inc. has a capital structure of 25 percent equity, 15 percent preferred stock, and 60 percent debt. If the before-tax component costs of equity, preferred stock and debt are 13.5 percent, 9.5 percent and 4 percent, respectively, what is TW's WACC if the firm faces an average tax rate of 21 percent?

A) 7.19 percent

B) 6.70 percent

C) 2.90 percent

D) 9.0 percent

44) Suppose that PAW, Inc. has a capital structure of 60 percent equity, 10 percent preferred stock, and 30 percent debt. If the before-tax component costs of equity, preferred stock and debt are 17.5 percent, 12 percent and 6.5 percent, respectively, what is PAW's WACC if the firm faces an average tax rate of 21 percent?

A) 10.71 percent

B) 4.00 percent

C) 13.24 percent

D) 13.10 percent

45) Suppose that TNT, Inc. has a capital structure of 43 percent equity, 23 percent preferred stock, and 34 percent debt. If the after-tax component costs of equity, preferred stock and debt are 15.4 percent, 10 percent and 7 percent, respectively, what is TNT's WACC if the firm faces an average tax rate of 21 percent?

A) 9.45 percent

B) 11.30 percent

C) 10.64 percent

D) 8.93 percent

46) JAK Industries has 5 million shares of stock outstanding selling at $25 per share and an issue of $40 million in 8 percent, annual coupon bonds with a maturity of 15 years, selling at 108 percent of par ($1,000). If JAK's weighted average tax rate is 21 percent and its cost of equity is 15 percent, what is JAK's WACC?

A) 9.19 percent

B) 12.59 percent

C) 12.50 percent

D) 12.77 percent

47) FDR Industries has 50 million shares of stock outstanding selling at $30 per share and an issue of $200 million in 9.5 percent, annual coupon bonds with a maturity of 10 years, selling at 97 percent of par ($1,000). If FDR's weighted average tax rate is 21 percent and its cost of equity is 16 percent, what is FDR's WACC?

A) 12.75 percent

B) 15.07 percent

C) 14.88 percent

D) 15.11 percent

48) XYZ Industries has 10 million shares of stock outstanding selling at $10 per share with par of $1 per share. The company also has an issue of $30 million in 8.5 percent, annual coupon bonds with a maturity of 25 years, selling at 102 percent of par ($1,000). If XYZ's weighted average tax rate is 21 percent and its cost of equity is 15 percent, what is XYZ's WACC?

A) 8.06 percent

B) 11.75 percent

C) 13.02 percent

D) 13.43 percent

49) Cup Cake Ltd. has 20 million shares of stock outstanding selling at $25 per share and an issue of $30 million in 8 percent, annual coupon bonds with a maturity of 16 years, selling at 98 percent of par ($1,000). If Cup Cake's weighted average tax rate is 21 percent, its next dividend is expected to be $2.00 per share, and all future dividends are expected to grow at 4 percent per year, indefinitely, what is its WACC?

A) 7.94 percent

B) 10.00 percent

C) 11.69 percent

D) 11.79 percent

50) Crab Cakes Ltd. has 5 million shares of stock outstanding selling at $15 per share and par value $1 per share. The company has an issue of $10 million in 10 percent, annual coupon bonds with a maturity of 25 years, selling at 97 percent of par ($1,000). If Crab Cakes' weighted average tax rate is 21 percent, its next dividend is expected to be $1.00 per share, and all future dividends are expected to grow at 5 percent per year, indefinitely, what is its WACC?

A) 8.42 percent

B) 10.84 percent

C) 11.27 percent

D) 11.52 percent

51) Pumpkin Pie Industries has 5 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $50 per share, the preferred shares are selling for $31 per share, and the bonds are selling for 98 percent of par ($1,000), what would be the weights used in the calculation of Pumpkin Pie's WACC for common stock, preferred stock, and bonds, respectively?

A) 33.33 percent, 33.33 percent, 33.33 percent

B) 83.19 percent, 16.64 percent, 0.17 percent

C) 85.97 percent, 10.67 percent, 3.38 percent

D) 27.93 percent, 17.32 percent, 54.75 percent

52) Sea Shell Industries has 50 million shares of common stock outstanding, 10 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $19 per share, the preferred shares are selling for $8.50 per share, and the bonds are selling for 97 percent of par ($1,000), what would be the weights used in the calculation of Sea Shell's WACC for common stock, preferred stock, and bonds, respectively?

A) 33.33 percent, 33.33 percent, 33.33 percent

B) 83.19 percent, 16.64 percent, 0.17 percent

C) 15.26 percent, 6.83 percent, 77.91 percent

D) 83.92 percent, 7.51 percent, 8.57 percent

53) Rings N Things Industries has 40 million shares of common stock outstanding, 20 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $25 per share, the preferred shares are selling for $15 per share, and the bonds are selling for 100 percent of par ($1,000), what would be the weights used in the calculation of Rings' WACC for common stock, preferred stock, and bonds, respectively?

A) 33.33 percent, 33.33 percent, 33.33 percent

B) 74.07 percent, 22.22 percent, 3.71 percent

C) 66.61 percent, 33.31 percent, 0.08 percent

D) 17.86 percent, 10.71 percent, 71.43 percent

54) Accessory Industries has 2 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $22 per share, the preferred shares are selling for $10.50 per share, and the bonds are selling for 96 percent of par ($1,000), what would be the weights used in the calculation of Accessory's WACC for common stock, preferred stock, and bonds, respectively?

A) 33.33 percent, 33.33 percent, 33.33 percent

B) 29.23 percent, 6.98 percent, 63.79 percent

C) 64.52 percent, 32.26 percent, 3.22 percent

D) 17.12 percent, 8.17 percent, 74.71 percent

55) Suppose that Tan Lines' common shares sell for $20 per share, are expected to set their next annual dividend at $1.00 per share, and that all future dividends are expected to grow by 5 percent per year, indefinitely. If Tan Lines faces a flotation cost of 10 percent on new equity issues, what will be the flotation-adjusted cost of equity?

A) 5.06 percent

B) 5.50 percent

C) 10.00 percent

D) 10.56 percent

56) Suppose that Wave Runners' common shares sell for $35 per share, are expected to set their next annual dividend at $2.00 per share, and that all future dividends are expected to grow by 10 percent per year, indefinitely. If Wave faces a flotation cost of 15 percent on new equity issues, what will be the flotation-adjusted cost of equity?

A) 6.73 percent

B) 10.07 percent

C) 15.71 percent

D) 16.72 percent

57) Suppose that Beach Blanket's common shares sell for $55 per share, are expected to set their next annual dividend at $3.00 per share, and that all future dividends are expected to grow by 8 percent per year, indefinitely. If Beach faces a flotation cost of 10 percent on new equity issues, what will be the flotation-adjusted cost of equity?

A) 5.45 percent

B) 8.06 percent

C) 13.45 percent

D) 14.06 percent

58) Suppose that Tan Lotion's common shares sell for $18 per share, are expected to set their next annual dividend at $1.00 per share, and that all future dividends are expected to grow by 7 percent per year, indefinitely. If Tan Lotion faces a flotation cost of 12 percent on new equity issues, what will be the flotation-adjusted cost of equity?

A) 6.37 percent

B) 7.06 percent

C) 12.56 percent

D) 13.31 percent

59) A firm has 1,000,000 shares of common stock outstanding, each with a market price of $10.00 per share. It has 15,000 bonds outstanding, each selling for $900 (with a face value of $1,000). The bonds mature in 15 years, have a coupon rate of 10 percent, and pay coupons annually. The firm's equity has a beta of 1.5, and the expected market return is 20 percent. The tax rate is 21 percent and the WACC is 16 percent. What is the risk-free rate?

A) 9.16 percent

B) 11.4 percent

C) 4.8 percent

D) 16.0 percent

60) A firm has 4,000,000 shares of common stock outstanding, each with a market price of $12.00 per share. It has 25,000 bonds outstanding, each selling for $980 (with a face value of $1,000). The bonds mature in 20 years, have a coupon rate of 9 percent, and pay coupons semiannually. The firm's equity has a beta of 1.5, and the expected market return is 21 percent. The tax rate is 21 percent and the WACC is 15 percent. What is the risk-free rate?

A) 7.12 percent

B) 6.28 percent

C) 9.22 percent

D) 19.36 percent

61) An all-equity firm is considering the projects shown as follows. The T-bill rate is 3 percent and the market risk premium is 6 percent. If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s) will be incorrectly rejected?

A) Project A

B) Projects B and C

C) Project D

D) Project B

62) An all-equity firm is considering the projects shown as follows.

The T-bill rate is 4 percent and the market risk premium is 8 percent. If the firm uses its current WACC of 13 percent to evaluate these projects, which project(s) will be incorrectly accepted?

A) Project A

B) Project C

C) Project D

D) Projects C and D

63) An all-equity firm is considering the projects shown as follows.

The T-bill rate is 4 percent and the market risk premium is 9 percent. If the firm uses its current WACC of 14 percent to evaluate these projects, which project(s) will be incorrectly rejected?

A) Project A

B) Project B

C) Project C

D) Project D

64) Diddy Corp. stock has a beta of 1.0, the current risk-free rate is 5 percent, and the expected return on the market is 15.5 percent. What is Diddy's cost of equity?

A) 15.50 percent

B) 14.20 percent

C) 18.50 percent

D) 16.30 percent

65) JaiLai Cos. stock has a beta of 1.7, the current risk-free rate is 6.2 percent, and the expected return on the market is 11 percent. What is JaiLai's cost of equity?

A) 13.81 percent

B) 15.19 percent

C) 13.41 percent

D) 14.36 percent

66) Oberon Inc. has a $20 million ($1,000 face value) 10-year bond issue selling for 99 percent of par that pays an annual coupon of 7.25 percent. What would be Oberon's before-tax component cost of debt?

A) 6.12 percent

B) 7.02 percent

C) 7.40 percent

D) 8.15 percent

67) KatyDid Clothes has a $150 million ($1,000 face value) 15-year bond issue selling for 106 percent of par that carries a coupon rate of 8 percent, paid semiannually. What would be KatyDid's before-tax component cost of debt?

A) 3.67 percent

B) 7.34 percent

C) 8.12 percent

D) 7.09 percent

68) KatyDid Clothes has a $150 million ($1,000 face value) 15-year bond issue selling for 86 percent of par that carries a coupon rate of 8 percent, paid semiannually. What would be KatyDid's before-tax component cost of debt?

A) 4.90 percent

B) 8.13 percent

C) 9.80 percent

D) 7.09 percent

69) Marme Inc. has preferred stock selling for 137 percent of par that pays an 11 percent annual dividend. What would be Marme's component cost of preferred stock?

A) 11.00 percent

B) 8.03 percent

C) 8.17 percent

D) 10.16 percent

70) FarCry Industries, a maker of telecommunications equipment, has 6 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $27 per share, the preferred shares are selling for $15 per share, and the bonds are selling for 119 percent of par ($1,000), what weight should you use for debt in the computation of FarCry's WACC?

A) 4.93 percent

B) 5.07 percent

C) 5.81 percent

D) 6.30 percent

71) OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $21 per share, the preferred shares are selling for $10 per share, and the bonds are selling for 111 percent of par ($1,000), what weight should you use for debt in the computation of OMG's WACC?

A) 32.74 percent

B) 29.86 percent

C) 25.79 percent

D) 21.86 percent

72) FarCry Industries, a maker of telecommunications equipment, has 26 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares sell for $12 per share, the preferred shares sell for $114.50 per share, and the bonds sell for 98 percent of par ($1,000), what weight should you use for preferred stock in the computation of FarCry's WACC?

A) 28.52 percent

B) 27.51 percent

C) 26.24 percent

D) 25.01 percent

73) FarCry Industries, a maker of telecommunications equipment, has 26 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares sell for $15 per share, the preferred shares sell for $114.50 per share, and the bonds sell for 101 percent of par ($1,000), what weight should you use for preferred stock in the computation of FarCry's WACC?

A) 28.52 percent

B) 27.51 percent

C) 26.24 percent

D) 22.25 percent

74) OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of preferred stock outstanding, and 5 thousand bonds. If the common shares sell for $17 per share, the preferred shares sell for $126 per share, and the bonds sell for 117 percent of par ($1,000), what weight should you use for preferred stock in the computation of OMG's WACC?

A) 28.91 percent

B) 31.58 percent

C) 47.91 percent

D) 83.66 percent

75) JLP Industries has 6.5 million shares of common stock outstanding with a market price of $20.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 25,000 bonds outstanding, each with face value $1,000 and selling at 90 percent of par value. The cost of equity is 14 percent, the cost of preferred stock is 10 percent, and the yield of the debt is 6.25%. If JLP's tax rate is 34 percent, what is the WACC?

A) 12.39 percent

B) 12.98 percent

C) 13.13 percent

D) 13.72 percent

76) TAFKAP Industries has 8 million shares of stock outstanding selling at $17 per share and an issue of $20 million in 7.5 percent, annual coupon bonds with a maturity of 15 years, selling at 109 percent of par ($1,000). If TAFKAP's weighted average tax rate is 21% and its cost of equity is 12.5 percent, what is TAFKAP's WACC?

A) 11.02 percent

B) 11.49 percent

C) 12.16 percent

D) 12.83 percent

77) Johnny Cake Ltd. has 10 million shares of stock outstanding selling at $20 per share and an issue of $50 million in 5.12 percent, annual coupon bonds with a maturity of 13 years, selling at 93.5 percent of par ($1,000). If Johnny Cake's weighted average tax rate is 21 percent, its next dividend is expected to be $2.00 per share, and all future dividends are expected to grow at 5 percent per year, indefinitely, what is its WACC?

A) 12.64 percent

B) 13.27 percent

C) 13.03 percent

D) 14.06 percent

78) A firm has 5,000,000 shares of common stock outstanding, each with a market price of $8.00 per share. It has 25,000 bonds outstanding, each selling for $1,100 with a $1,000 face value. The bonds mature in 12 years, have a coupon rate of 9 percent, and pay coupons semiannually. The firm's equity has a beta of 1.4, and the expected market return is 15 percent. The tax rate is 21 percent and the WACC is 14 percent. Calculate the risk-free rate.

A) 3.90 percent

B) 15.27 percent

C) 20.18 percent

D) 1.19 percent

79) A firm has 5,000,000 shares of common stock outstanding, each with a market price of $10.00 per share. It has 55,000 bonds outstanding, each selling for $990 with a $1,000 face value. The bonds mature in 15 years, have a coupon rate of 8 percent, and pay coupons semiannually. The firm's equity has a beta of 2.0, and the expected market return is 15 percent. The tax rate is 21 percent and the WACC is 16 percent. Calculate the risk-free rate.

A) 27.68 percent

B) 1.79 percent

C) 3.56 percent

D) 2.12 percent

80) An all-equity firm is considering the projects shown as follows. The T-bill rate is 3 percent and the market risk premium is 6 percent. If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s), if any, will be incorrectly rejected?

A) Only Project A would be incorrectly rejected.

B) Both Projects A and C would be incorrectly rejected.

C) Projects A, B, and C would be incorrectly rejected.

D) None of the projects would be incorrectly rejected.

81) An all-equity firm is considering the projects shown as follows. The T-bill rate is 4 percent and the market risk premium is 7 percent. If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s), if any, will be incorrectly accepted or rejected?

A) Project A would be incorrectly rejected.

B) Both Projects A and C would be incorrectly rejected.

C) Project A will be incorrectly rejected and Project C would be incorrectly accepted.

D) None of the projects will be incorrectly accepted or rejected.

82) Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.5, 1.0, 1.3 and 1.6, respectively. If all current and future projects will be financed with half debt and half equity, and if the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 7 percent) is 14 percent and the after-tax yield on the company's bonds is 8 percent, what are the WACCs for divisions A through D?

A) 9.00 percent; 10.25 percent; 12.95 percent; 13.15 percent

B) 9.75 percent; 12.00 percent; 12.65 percent; 13.75 percent

C) 9.25 percent; 11.00 percent; 12.05 percent; 13.10 percent

D) 8.95 percent; 10.15 percent; 12.50 percent; 13.45 percent

83) Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has 2 divisions, A and B, with betas for each division of 0.5 and 1.5, respectively. If all current and future projects will be financed with half debt and half equity, and if the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 5 percent) is 14 percent and the after-tax yield on the company's bonds is 6 percent, what are the WACCs for divisions A and B?

A) 7.75 percent; 12.25 percent

B) 8.75 percent; 12.00 percent

C) 9.25 percent; 11.00 percent

D) 8.95 percent; 10.15 percent

84) Which of the following statements is correct?

A) The weighted average cost of capital is calculated on a before-tax basis.

B) An increase in the market risk premium is likely to increase the weighted average cost of capital.

C) The weights of debt and equity should be based on the balance sheet because this is the most accurate assessment of the valuation.

D) All of these choices are correct.

85) Which of the following statements is correct?

A) If the risk-free rate increases, it will have no impact on the weighted average cost of capital.

B) Investor returns are reduced when float costs increase, and therefore float costs reduce the weighted average cost of capital.

C) The weighted average cost of capital is a historical cost.

D) None of these choices are correct.

86) Which of the following will impact the cost of equity component in the weighted average cost of capital?

A) the risk-free rate

B) beta

C) expected return on the market

D) all of these choices are correct.

87) ADK Industries common shares sell for $40 per share. ADK expects to set their next annual dividend at $1.75 per share. If ADK expects future dividends to grow at 7 percent per year, indefinitely, the current risk-free rate is 4 percent, the expected rate on the market is 11 percent, and the stock has a beta of 1.2, what should be the best estimate of the firm's cost of equity, by taking an average of the 2 estimates?

A) 11.89 percent

B) 11.38 percent

C) 12.40 percent

D) 12.71 percent

88) ADK Industries common shares sell for $60 per share. ADK expects to set their next annual dividend at $3.75 per share. If ADK expects future dividends to grow at 9 percent per year, indefinitely, the current risk-free rate is 4 percent, the expected rate on the market is 11 percent, and the stock has a beta of 1.5, what should be the best estimate of the firm's cost of equity, by taking an average of the 2 estimates?

A) 15.25 percent

B) 14.50 percent

C) 14.88 percent

D) 15.03 percent

89) Which of the following will directly impact the cost of equity?

A) expected growth rate in sales

B) expected future tax rates

C) stock price

D) profit margins

90) Which of the following will directly impact the cost of debt?

A) capital structure

B) debt ratio

C) coupon rate

D) competition within the industry

91) ADK has 30,000 15-year, 9 percent annual coupon bonds outstanding. If the bonds currently sell for 111 percent of par and the firm pays an average tax rate of 21 percent, what will be the before-tax and after-tax component cost of debt?

A) 7.74 percent; 6.11 percent

B) 7.91 percent; 5.06 percent

C) 8.05 percent; 5.15 percent

D) 9 percent; 5 percent

92) ADK has 30,000 15-year, 9 percent semi-annual coupon bonds outstanding. If the bonds currently sell for 90 percent of par and the firm pays an average tax rate of 21 percent, what will be the before-tax and after-tax component cost of debt?

A) 11.19 percent; 7.61 percent

B) 10.32 percent; 8.15 percent

C) 9.85 percent; 6.70 percent

D) 10.12 percent; 6.88 percent

93) An estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular business unit is known as the

A) business unit WACC

B) pure-play beta

C) divisional WACC

D) component cost

94) The ________ approach to computing a divisional weighted average cost of capital (WACC) uses the average beta of projects in each division to calculate the WACC.

A) subjective

B) objective

C) firmwide

D) implicit

95) The ________ approach to computing a divisional weighted average cost of capital (WACC) requires only that WACCs for "risky" and "relatively safe" divisions be adjusted.

A) subjective

B) objective

C) firmwide

D) implicit

96) Flotation costs are

A) insignificant and can be assumed away.

B) the difference between the bid-ask spread on the sale of the security.

C) commissions to the underwriting firm that floats the issue.

D) None of these choices are correct.

97) Which of the following statements is correct?

A) The flotation-adjusted cost of equity will always be less than the cost of equity that has not been adjusted for flotation costs.

B) The flotation-adjusted cost of equity will always be more than the cost of equity that has not been adjusted for flotation costs.

C) The flotation-adjusted cost of equity may be more than or less than the cost of equity that has not been adjusted for flotation costs.

D) None of these choices are correct.

98) What is the theoretical minimum for the weighted average cost of capital?

A) the after-tax cost of debt

B) the cost of preferred stock

C) CAPM

D) the cost of equity

99) Which of the following is a situation in which you would want to use the CAPM approach for estimating the component cost of equity?

A) when you are able to estimate the market risk premium with certainty

B) when you are able to estimate the risk-free rate with certainty

C) when you are able to estimate the firm's beta with certainty

D) when the firm pays a constant dividend

100) Which of the following is a situation in which you would want to use the constant-growth model approach for estimating the component cost of equity?

A) when the firm has a low beta

B) when the firm has multiple divisions

C) when the firm's stock is expected to experience constant dividend growth

D) when the firm has a high level of financial leverage

101) The reason that we do not use an after-tax cost of preferred stock is

A) because preferred dividends are paid out of before-tax income.

B) because most of the investors in preferred stock do not pay tax on the dividends.

C) because we can only estimate the marginal tax rate of the preferred stockholders.

D) none of these choices are correct.

102) Why do we use market-value weights instead of book-value weights?

A) Because firms often "window-dress" their financial statements.

B) Because we are interested in determining what the cost of financing the firm's assets would be given today's market situation and the component costs the firm currently faces, not what the historical prices would have been.

C) Because it is required in the Sarbanes-Oxley regulations.

D) None of these choices are correct.

103) Suppose a new project was going to be financed partially with retained earnings. What flotation costs should you use for retained earnings?

A) use the same flotation cost that would be used to issue new common stock

B) use an average of the flotation costs for debt, preferred and common stock

C) use the industry average flotation cost for common stock

D) zero

104) Which of the following is a reason why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division?

A) Managers in different divisions may use different methods to calculate the WACC.

B) The expected return of the new project may be incorrect.

C) If projects are assigned to the wrong division, the risk of that division may be significantly different than the risk of the project, implying that the project will be evaluated with a divisional cost of capital that is much different from what a project-specific cost of capital would be.

D) None of these choices are correct.

105) Which of the following statements is correct?

A) If a new project is riskier than the firm's existing projects, then it should expect to be "charged" a higher cost of capital than the firm's overall WACC.

B) If a new project is riskier than the firm's existing projects, then it should expect to be "charged" a lower cost of capital than the firm's overall WACC.

C) The project's risk and the cost of capital to which it is compared are independent.

D) None of these choices are correct.

106) A proxy beta is

A) the average beta of firms that are only engaged in the proposed new line of business.

B) the industry average beta that is used in lieu of the firm's beta because the firm has not existed long enough to have a beta calculated.

C) the beta used when the firm has a great deal of business risk.

D) None of these choices are correct.

107) Which of the following statements is correct?

A) The WACC is a measure of the before-tax cost of capital.

B) The WACC measures the marginal cost of capital.

C) It is common that the after-tax cost of debt exceeds the cost of equity.

D) None of these choices are correct.

108) Which of the following statements is correct?

A) The WACC measures the before-tax cost of capital.

B) An increase in the firm's marginal corporate tax rate will decrease the weighted average cost of capital.

C) Flotation costs can decrease the weighted average cost of capital.

D) None of these choices are correct.

109) Which of the following statements is correct?

A) A decrease in the firm's marginal corporate tax rate will decrease the weighted average cost of capital.

B) Flotation costs can decrease the weighted average cost of capital.

C) The cost of debt is based on the cost of all liabilities, including accounts payable and accruals.

D) None of these choices are correct.

110) Which of the following will increase the cost of equity?

A) The firm's share price falls 10 percent.

B) The firm is expected to reduce its dividend.

C) The firm's corporate tax rate increases.

D) None of these choices are correct.

111) Which of the following is most correct?

A) When comparing two firms within the same industry, most analysts calculate the weighted average cost of capital on a before-tax basis to facilitate comparisons.

B) Firms should use historical costs rather than marginal costs of capital.

C) An increase in the risk-free rate will increase the cost of equity.

D) All of these choices are correct.

112) Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $890. The firm's tax rate is 21 percent. What is the firm's after-tax cost of debt?

A) 10.86 percent

B) 3.91 percent

C) 9.81 percent

D) 8.58 percent

113) A firm uses only debt and equity in its capital structure. The firm's weight of debt is 40 percent. The firm could issue new bonds at a yield to maturity of 9 percent and the firm has a tax rate of 21 percent. If the firm's WACC is 11 percent, what is the firm's cost of equity?

A) 15.92 percent

B) 13.59 percent

C) 15.03 percent

D) 15.68 percent

114) A firm uses only debt and equity in its capital structure. The firm's weight of debt is 45 percent. The firm could issue new bonds at a yield to maturity of 10 percent and the firm has a tax rate of 21 percent. If the firm's WACC is 12 percent, what is the firm's cost of equity?

A) 15.35 percent

B) 15.63 percent

C) 16.09 percent

D) 14.57 percent

115) A firm uses only debt and equity in its capital structure. The firm's weight of equity is 70 percent. The firm's cost of equity is 13 percent and it has a tax rate of 21 percent. If the firm's WACC is 11 percent, what is the firm's before-tax cost of debt?

A) 7.19 percent

B) 8.02 percent

C) 6.38 percent

D) 1.9 percent

116) A firm uses only debt and equity in its capital structure. The firm's weight of equity is 75 percent. The firm's cost of equity is 16 percent and it has a tax rate of 21 percent. If the firm's WACC is 13%, what is the firm's before-tax cost of debt?

A) 6.89 percent

B) 6.28 percent

C) 5.71 percent

D) 5.06 percent

117) Uptown Inc. has preferred stock selling for 102 percent of par that pays a 6 percent annual coupon. What would be Uptown's component cost of preferred stock?

A) 6.12 percent

B) 6.00 percent

C) 5.88 percent

D) 1.02 percent

118) Paper Exchange has 10 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $25 per share, the preferred shares are selling for $10 per share, and the bonds are selling for 98 percent of par, what would be the weight used for preferred stock in the computation of Paper's WACC?

A) 12.00 percent

B) 12.56 percent

C) 5.00 percent

D) 3.33 percent

119) Suppose that T-shirts, Inc.'s capital structure features 25 percent equity, 75 percent debt, and that its before-tax cost of debt is 8 percent, while its cost of equity is 12 percent. If the appropriate weighted average tax rate is 21 percent, what will be T-shirts' WACC?

A) 9.00 percent

B) 7.74 percent

C) 7.20 percent

D) 4.75 percent

120) A firm uses only debt and equity in its capital structure. The firm's weight of equity is 35 percent. The firm's cost of equity is 14 percent and it has a tax rate of 21 percent. If the firm's WACC is 11 percent, what is the firm's before-tax cost of debt?

A) 11.88 percent

B) 9.38 percent

C) 5.50 percent

D) −3.00 percent

121) Amino Industries common shares sell for $100 per share. Amino expects to set their next annual dividend at $4.00 per share. If Amino expects future dividends to grow at 5 percent per year, indefinitely, the current risk-free rate is 2 percent, the expected rate on the market is 7 percent, and the stock has a beta of 1.5, what should be the best estimate of the firm's cost of equity, by taking an average of the 2 estimates?

A) 18.50 percent

B) 13.25 percent

C) 9.25 percent

D) 7.27 percent

122) Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has 2 divisions, A and B, with betas for each division of 1.25 and 2.5, respectively. If all current and future projects will be financed with half debt and half equity, and if the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 4 percent) is 12 percent and the after-tax yield on the company's bonds is 8 percent, what are the WACCs for divisions A and B?

A) 11.00 percent; 16.00 percent

B) 15.00 percent; 30.00 percent

C) 25.00 percent; 30.00 percent

D) 20.00 percent; 34.00 percent

123) A firm uses only debt and equity in its capital structure. The firm's weight of debt is 75 percent. The firm could issue new bonds at a yield to maturity of 12 percent and the firm has a tax rate of 21 percent. If the firm's WACC is 13 percent, what is the firm's cost of equity?

A) 38.29 percent

B) 36.00 percent

C) 23.56 percent

D) 4.00 percent