Test Bank Docx The Cost Of Capital Ch.13 5th Edition

Fundamentals of Corporate Finance, 5e (Parrino)

Chapter 13 The Cost of Capital

1) Systematic risk is the only risk that investors require compensation for bearing.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

2) Using a firm's overall cost of capital to evaluate a project's cash flows is problematic in that the firm is a collection of projects, with the possibility that each project has a different level of risk than the other projects.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

3) The balance sheet item is based on market values, just like the accounting balance sheet.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

4) If the market value of a firm's assets is greater than the book value of its assets, then the market value of the firm's liabilities and equity must also be greater than the book value of the firm's liabilities and equity.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

5) The beta of a firm is equal to the weighted average of the betas of the individual projects that the firm is currently undertaking.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

6) Due to the effect of diversification, the risk associated with the assets of a firm must be less than the risk associated with the financing methods such as debt and equity that a firm is utilizing to finance its assets.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

7) A firm is currently taking on two projects with an individual cost of capital of 10 percent and 12 percent for each of the projects. This means that the before-tax cost of capital for the firm must be between 10 and 12 percent.

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

8) If a firm finances the purchase of an asset with cash, then it has zero financing cost to the firm.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

9) If one observes the market quoted price of a debt security with a certain maturity where the expected cash flows of that security are known, then one can calculate the current cost of that security to the firm.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

10) Long-term debt typically describes debt that will mature longer than one year.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

11) Long-term debt is generally viewed as a permanent financing source for a firm.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

12) With respect to the cost of capital, we are generally interested in the current cost of a source of financing.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

13) The historical cost of long-term debt is the appropriate cost of debt for WACC calculations.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

14) Milton Corp. issued bonds 10 years ago with a coupon rate of 10 percent at a price of $1,000. The current price of the bonds is $980. The before-tax cost of the debt to the firm is still 10 percent.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

15) The yield to maturity for an annual coupon paying bond will always be equal to the coupon rate.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

16) The yield to maturity is the discount rate that makes the present value of coupon and principal payments equal to the price of the bond.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

17) The current cost of bank debt of a firm can be determined by asking the firm's banker.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

18) If a firm is subject to income taxes, then the after-tax cost of debt for the firm will be less than the before-tax cost of debt.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

19) The issuance costs of new debt securities can be ignored since those costs will not be reflected in the yield to maturity of the debt in the future.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

20) Utilizing the CAPM to estimate the cost of capital for a project is difficult in practice because analysts do not have the stock returns from individual projects that can be used in a regression analysis for estimating a project's beta.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

21) Estimates of expected returns based on market security prices will be reliable in all types of markets, including those deemed less efficient than others.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

22) The cost of equity for a firm must take the cost of preferred stock that the firm has outstanding into account.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

23) The appropriate Treasury rate to use in calculating the cost of equity for a firm based on CAPM is a short-term rate.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

24) When trying to estimate the cost of equity for a firm using the CAPM, it is possible to find the beta of a comparable, publicly traded firm whose primary business is closely related to the firm.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

25) The market risk premium for the future is always perfectly known, and it is 6.51 percent.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

26) If a firm is currently paying common share dividends to investors and those dividends are expected to grow at a low but steady rate in the future, then the cost of common equity for the firm can be calculated by using the current price of the firm's common stocks.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

27) The current cost of preferred equity can be found by taking the ratio of the annual dividend on the preferred stock to the current price of preferred stocks.

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

28) The CAPM can only be used to determine the cost of common equity.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

29) The proportions of debt and equity used to determine the weighted average cost of capital for a firm is based on the market values of debt and equity outstanding.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

30) The weighted average cost of capital for a firm when correctly calculated can be used to discount the cash flows for any new project that the firm may undertake in the future.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

31) The estimated cost of capital the financial manager uses for efficiency projects tends to be higher than the cost of capital used to evaluate new projects.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

32) When using a single rate, such as the WACC, to discount cash flows for all projects of a particular company without considering the varying degree of risks, the discount rate could lead to accepting projects that will actually have negative NPVs.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

33) If a company's weighted average cost of capital is less than the required return on equity, then the firm:

A) is financed with more than 50 percent debt.

B) is perceived to be safe.

C) has debt in its capital structure.

D) must have preferred stock in its capital structure.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

34) Firms have no way to directly estimate the discount rate that reflects the risk of:

A) a publicly traded security.

B) its debt securities.

C) the incremental cash flows from a particular project.

D) None of these are correct.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

35) A firm's overall cost of capital is:

A) less than its cost of debt.

B) a weighted average of the costs of capital for the collection of individual projects that the firm is currently undertaking.

C) best measured by the cost of capital of the riskiest projects that the firm is working on.

D) None of these are correct.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

36) The finance balance sheet is:

A) the same as the accounting balance sheet, but it is based on market values.

B) the same as the accounting balance sheet, but it does not have to balance.

C) based on cash rather than accrual accounting.

D) the same as the accounting balance sheet, but it is based on historical values.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

37) The value of the cash flows that the assets of a firm are expected to generate must equal:

A) the value of the cash flows claimed by the equity holders.

B) the value of the cash flows claimed by the debt holders.

C) the value of the cash flows claimed by both the equity holders and debt holders.

D) the revenue produced by the firm.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

38) The beta for a firm can be estimated by:

A) adding up the betas of the firm's individual projects.

B) taking the weighted average of the betas for the firm's individual projects.

C) taking the simple average of the betas for the firm's individual projects.

D) None of these are correct.

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

39) A firm can be viewed as:

A) a portfolio of individual projects with their own risks, cost of capital, and returns.

B) a collection of equity shares used to finance the firm.

C) a collection of debt instruments used to finance the firm..

D) a portfolio of all individual projects in the industry with its own risks, cost of capital, and returns.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

40) In order for a firm to estimate its cost of debt from observing the price of its debt instruments, the:

A) firm must depend on markets being reasonably efficient.

B) debt must be privately held by the firm.

C) beta of the debt must be greater than the beta of the firm's equity.

D) None of these are correct.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

41) If markets are not reasonably efficient, then:

A) the estimates of expected returns are not needed.

B) the need for a discount rate to analyze project cash flows is not needed.

C) the estimates of expected returns based on security prices will not be reliable.

D) None of these are correct.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

42) When estimating the cost of debt for a firm, we are primarily interested in:

A) the weighted average cost of capital.

B) the cost of long-term debt.

C) the coupon rate of the debt.

D) None of these are correct.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

43) Long-term debt typically describes:

A) debt with a maturity greater than one year.

B) coupon debt only.

C) publicly traded debt.

D) None of these are correct.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

44) Which of the following need to be excluded from the calculation of a firm's amount of permanent debt?

A) Long-term debt

B) Revolving lines of credit

C) Mortgage debt

D) None of these are correct

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

45) When analyzing a firm's cost of debt, we are typically interested in:

A) the cost of the debt on the date that the analysis is being completed.

B) the coupon rate on the firm's bonds.

C) the cost of the debt and cost of preferred stock on the date that the analysis is being completed.

D) None of these are correct.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

46) If a firm has bonds outstanding and the firm would like to calculate its current cost of debt, then the firm would:

A) use the coupon rate of the bonds to estimate the cost.

B) use the current yield to maturity of the bonds to estimate the cost.

C) use the current yield of the bonds to estimate the cost.

D) None of these are correct.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

47) A bond has a coupon rate of 6 percent and the bond makes semiannual coupon payments. The dollar amount of coupon interest received every six months is:

A) $60.

B) $30.

C) $30 plus or minus the prorated portion of the discount or premium that the bond was purchased for.

D) $60 plus or minus the prorated portion of the discount or premium that the bond was purchased for.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

48) Bond issuance costs include:

A) investment banking fees.

B) legal fees.

C) accountant fees.

D) All of these are correct.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

49) Income taxes have the effect of:

A) increasing the cost of debt for a firm.

B) decreasing the cost of debt for a firm.

C) decreasing the cost of equity for a firm.

D) decreasing both the cost of debt and equity for a firm.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

50) Bellamee, Inc. has semiannual bonds outstanding with five years to maturity, and the bonds are priced at $920.87. If the bonds have a coupon rate of 7 percent, then what is the YTM for the bonds? Round your final percentage answer to one decimal place.

A) 4.5%

B) 7.0%

C) 9.0%

D) 9.2%

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

51) Dynamo Corporation has semiannual bonds outstanding with 12 years to maturity, and the bonds are currently priced at $1,080.29. If the bonds have a coupon rate of 8 percent, then what is the equivalent annual return (EAR) to the investor for purchasing the bonds at the stated price? Round your final percentage answer to two decimal places.

A) 3.5%

B) 7.00%

C) 7.12%

D) 8.00%

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

52) Beckham Corporation has semiannual bonds outstanding with 13 years to maturity and the bonds are currently priced at $746.16. If the bonds have a coupon rate of 8.5 percent, then what is the after-tax cost of debt for Beckham if its marginal tax rate is 35 percent? Round your intermediate calculation to two decimal places and the final percentage answer to three decimal places.

A) 6.250%

B) 8.125%

C) 12.500%

D) 12.890%

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

53) PackMan Corporation has semiannual bonds outstanding with nine years to maturity and the bonds are currently priced at $754.08. If the bonds have a coupon rate of 7.25 percent, what is the after-tax cost of debt for PackMan if its marginal tax rate is 30 percent? Round your intermediate calculation to two decimal places and the final percentage answer to three decimal places.

A) 7.050%

B) 8.225%

C) 11.750%

D) 12.095%

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

54) A recent leveraged buyout was financed with $50M: $12M in equity capital, $20M in unsecured debt borrowed at 7 percent from one bank, and the remaining debt from another bank at 8.5 percent. What is the overall after-tax cost of the debt if the firm's marginal tax rate is 33 percent?

A) 2.55%

B) 3.34%

C) 5.17%

D) 7.71%

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

55) The appropriate risk-free rate to use in calculating the cost of equity for a firm is:

A) a long-term Treasury rate.

B) a short-term Treasury rate.

C) an equal mix of short-term and long-term Treasury rates.

D) None of these are correct.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

56) The average risk-premium for the market from 1926 to 2019 was:

A) 8.00%.

B) 7.50%.

C) 6.11%.

D) 6.51% + the Treasury rate.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

57) The recommended model to estimate the cost of common equity for a firm is:

A) the one-stage constant growth dividend model.

B) the multistage-growth dividend model.

C) the capital asset pricing model (CAPM).

D) None of these are correct.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

58) Jacque Ewing Drilling, Inc. has a beta of 1.3. If the risk-free rate is 8 percent and the expected return on the market is 12 percent, what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 40 percent?

A) 7.92%

B) 13.20%

C) 15.57%

D) 23.60%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Global and Industry Perspectives

59) TeleNyckel, Inc. has a beta of 1.4. If the risk-free rate of return is 9 percent and the market risk premium is 5 percent, what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 30 percent?

A) 11.20%

B) 10.60%

C) 15.14%

D) 16.00%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Global and Industry Perspectives

60) Radical VenOil, Inc. has a cost of equity capital equal to 22.8 percent. If the risk-free rate of return is 10 percent and the expected return on the market is 18 percent, what is the firm's beta if the marginal tax rate is 35 percent?

A) 1.0

B) 1.28

C) 1.60

D) 4.10

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Global and Industry Perspectives

61) Gangland Water Guns, Inc. is expected to pay a dividend of $2.10 one year from today. If the growth in dividends is expected to remain at a flat rate of 3 percent forever, what is the cost of equity capital for Gangland if the price of its common shares is currently $17.50?

A) 12.00%

B) 14.65%

C) 15.00%

D) 15.36%

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

62) UltraFlex Diving Boards, Inc. just paid a dividend of $1.50. If the firm's growth in dividends is expected to remain at a flat rate of 4 percent forever, what is the cost of equity capital for Ultra Flex Diving Boards if the price of its common shares is currently $26.00?

A) 5.77%

B) 6.00%

C) 9.77%

D) 10.00%

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

63) Turquoise Electronics, Inc. paid a dividend of $1.87 last year. If the firm's growth in dividends is expected to be 10 percent next year and then zero thereafter, what is its cost of equity capital if the price of its common shares is currently $25.71?

A) 7.27%

B) 8.00%

C) 18.00%

D) The problem is not solvable with the information that is given.

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

64) The Dedus Shoes, Inc. has common shares with a price of $28.76 per share. The firm paid a dividend of $1.00 yesterday. If dividends are expected to grow at 10 percent for two years and then at 5 percent thereafter, what is the implied cost of common equity capital for Dedus? Round your final percentage answer to the nearest percentage.

A) 7%

B) 8%

C) 9%

D) 10%

Learning Objective: LO 3

Bloomcode: Application

AACSB: Evaluation

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

65) Tranquility, Inc. has common shares with a price of $18.37 per share. The firm paid a dividend of $1.50 yesterday. If dividends are expected to grow at a rate of 9 percent for three years and then at 2 percent thereafter, what is the implied cost of common equity capital for Tranquility? Round your final percentage answer to one decimal place.

A) 9.5%

B) 10.5%

C) 12.0%

D) 12.5%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

66) Oasis, Inc. has common shares with a price of $21.12 per share. The firm is expected to pay a dividend of $1.75 one year from today. Dividends are expected to grow at the rate of 10 percent for two years and then at 5 percent thereafter. What is the implied cost of common equity capital for Oasis? Round your final answer to the nearest percentage.

A) 13%

B) 14%

C) 15%

D) 16%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

67) Billy's Goat Coats has a preferred share issue outstanding with a current price of $38.89. The firm last paid a dividend on the issue of $3.50 per share. What is the firm's cost of preferred equity? Round your final answer to the nearest percentage.

A) 7%

B) 8%

C) 9%

D) 10%

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

68) Wally's War Duds has a preferred share issue outstanding with a current price of $26.57. The firm is expected to pay an annual dividend of $1.86 per share a year from today. What is the firm's cost of preferred equity? Round your final answer to two decimal places.

A) 6.50%

B) 7.00%

C) 7.50%

D) 8.00%

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

69) Melba's Toast has a preferred share issue outstanding with a current price of $19.50. The firm is expected to pay an annual dividend of $2.34 per share a year from today. What is the firm's cost of preferred equity? Round your final answer to two decimal places.

A) 11.50%

B) 11.75%

C) 12.00%

D) 12.25%

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

70) In order to use a firm's WACC to evaluate its future project's cash flows, which of the following must hold?

A) The project will be financed with the same proportion of debt and equity as the firm.

B) The systematic risk of the project is the same as the overall systematic risk of the firm.

C) The project should have conventional cash flows.

D) The project will be financed with the same proportion of debt and equity as the firm, and the systematic risk of the project is the same as the overall systematic risk of the firm.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

71) If the market risk premium is currently 6 percent and the risk-free rate of return is 4 percent, then what is the expected return on a common share with a beta of 2?

A) 8.0%

B) 10.0%

C) 12.0%

D) 16.0%

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Global and Industry Perspectives

72) What is the beta of a firm whose equity has an expected return of 21.3 percent when the risk-free rate of return is 7.0 percent and the expected return on the market is 18.0 percent?

A) 0.79

B) 1.30

C) 1.57

D) None of these are correct

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Global and Industry Perspectives

73) Stryder, Inc. has 3 million shares outstanding at a current price of $15 per share. The book value of the shares is $10 per share. The firm also has $30 million (based on par value) in bonds outstanding. The bonds are selling at a price equal to 101 percent of par. What is the market value of the firm?

A) $30.0 million

B) $45.0 million

C) $75.0 million

D) $75.3 million

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

74) The Diverse Co. has invested 40 percent of the firm's assets in a project with a beta of 0.4 and the remaining assets in a project with a beta of 1.8. What is the beta of the firm?

A) 0.96

B) 1.24

C) 1.28

D) None of these are correct

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Global and Industry Perspectives

75) You are analyzing the cost of capital for a firm that is financed with 65 percent equity and 35 percent debt. The cost of debt is 8 percent, while the cost of equity is 20 percent for the firm. What is the overall cost of capital for the firm? Assume that the firm pays no tax.

A) 12.2%

B) 14.0%

C) 15.8%

D) 20.0%

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

76) You are analyzing the cost of capital for a firm that is financed with $300 million of equity and $200 million of debt. The cost of debt for the firm is 9 percent, while the cost of equity is 19 percent. What is the overall cost of capital for the firm? Assume the firm pays no tax.

A) 13.0%

B) 14.0%

C) 15.0%

D) 16.0%

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

77) The WACC for a firm is 19.75 percent. You know that the firm is financed with $75 million of equity and $25 million of debt. The cost of debt is 7 percent. What is the cost of equity for the firm? Assume the firm pays no tax.

A) 19.75%

B) 24.00%

C) 32.50%

D) 58.00%

Learning Objective: LO 13

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

78) The WACC for a firm is 13.00 percent. You know that the firm's cost of debt is 10 percent and the cost of equity is 20 percent. What proportion of the firm is financed with debt? Assume the firm pays no tax.

A) 30%

B) 33%

C) 50%

D) 70%

Learning Objective: LO 1

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

79) Swirlpool, Inc. has found that its cost of common equity is 18 percent, and its cost of debt is 8 percent. The firm is financed with 60 percent common shares and 40 percent debt. What is the after-tax weighted average cost of capital for Swirlpool, if it is subject to a 40 percent marginal tax rate?

A) 10.37%

B) 12.00%

C) 12.72%

D) 14.00%

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

80) Maloney's, Inc. has found that its cost of common equity is 17 percent and its cost of debt is 6 percent. The firm is financed with $3,000,000 of common shares (market value) and $2,000,000 of debt. What is the after-tax weighted average cost of capital for Maloney's, if it is subject to a 40 percent marginal tax rate?

A) 8.96%

B) 11.16%

C) 11.64%

D) 12.60%

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

81) Ronnie's Comics has found that its cost of common equity is 15 percent and its cost of debt is 12 percent. The firm is financed with $250,000,000 of common shares (market value) and $750,000,000 of debt. What is the after-tax weighted average cost of capital for Ronnie's, if it is subject to a 35 percent marginal tax rate?

A) 6.05%

B) 9.60%

C) 8.75%

D) 13.65%

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

82) Poly's Parrot Shops has found that its cost of common equity is 17 percent. It has 7-year maturity semiannual bonds outstanding with a price of $767.03 that have a coupon rate of 7 percent. The firm is financed with $120,000,000 of common shares (market value) and $80,000,000 of debt. What is the after-tax weighted average cost of capital for Poly's, if it is subject to a 35 percent marginal tax rate? Round your final percentage answer to two decimal places.

A) 10.20%

B) 11.76%

C) 11.88%

D) 13.32%

Learning Objective: LO 1, 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

83) Marley's Pipe Shops has found that its common equity shares have a beta equal to 1.5 while the risk-free return is 8 percent and the expected return on the market is 14 percent. Its cost of debt is 12 percent. The firm is financed with $120,000,000 of common shares (market value) and $80,000,000 of debt. What is the after-tax weighted average cost of capital for Marley's, if it is subject to a 35 percent marginal tax rate?

A) 10.20%

B) 11.76%

C) 11.88%

D) 13.32%

Learning Objective: LO 1, 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Global and Industry Perspectives

84) Droz's Hiking Gear, Inc. has found that its common equity capital shares have a beta equal to 1.0 while the risk-free return is 8 percent and the expected return on the market is 14 percent. It has 7-year semiannual maturity bonds outstanding with a price of $767.03 that have a coupon rate of 7 percent. The firm is financed with $120,000,000 of common shares (market value) and $80,000,000 of debt. What is the after-tax weighted average cost of capital for Droz's, if it is subject to a 35 percent marginal tax rate? Round your final percentage answer to two decimal places.

A) 10.20%

B) 11.52%

C) 11.88%

D) 13.32%

Learning Objective: LO 1, 2, 3, and 4

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Global and Industry Perspectives

85) Which type of project do financial managers typically use the highest cost of capital when evaluating?

A) Extension projects

B) New product projects

C) Efficiency projects

D) Market expansion projects

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

86) Briefly explain why the book value of debt might not reflect the current cost of debt for a firm, with respect to a single issuance of debt.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

87) Explain the conditions under which the constant-growth dividend formula for the cost of common stock can be used to find the cost of common equity capital for a firm.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

88) Discuss the two major conditions for when a firm may use its current weighted average cost of capital to evaluate a new project's cash flows.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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