finance quiz assistance cost of capital

Q1.

What is the after tax cost of debt if the marginal tax rate is 30% and the yield to maturity on long-term bonds is 8.0%?

5.60%

2.4%

8.0%

8.1%

After tax cost of debt is YTM*(1-T)

Q3.

What is the cost of common stock if the dividend just paid was $2,00, the growth rate in dividends is expected to be 6.5% and the price of the stock is currently $35.50?

12.5%

12.16%

13.1%

Q4.

What is the estimated cost of equity if the risk free rate is 2.1%, the beta for the company is 1.45 and the expected return on the market is 8.9%?

11.96%

12.91%

15.01%

10.97%

Q5.

What is the cost of preferred stock if it is priced at 29.50 per share and pays a dividend of 1.75 per year?

5.93%

2.95%

16.86%

8.43%

Q8.

Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?

a.	Accounts payable.
b.	Common stock “raised” by reinvesting earnings.
c.	Common stock raised by new issues.
d.	Preferred stock.
e.	Long-term debt.

Q9.

With its current financial policies, Flagstaff Inc. will have to issue new common stock to fund its capital budget. Since new stock has a higher cost than reinvested earnings, Flagstaff would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?

a.	Increase the percentage of debt in the target capital structure.
b.	Increase the proposed capital budget.
c.	Reduce the amount of short-term bank debt in order to increase the current ratio.
d.	Reduce the percentage of debt in the target capital structure.
e.	Increase the dividend payout ratio for the upcoming year.

Q11.

Which of the following statements is CORRECT? Assume a company’s target capital structure is 50% debt and 50% common equity.

a.	The WACC is calculated on a before-tax basis.
b.	The WACC exceeds the cost of equity.
c.	The cost of equity is always equal to or greater than the cost of debt.
d.	The cost of reinvested earnings typically exceeds the cost of new common stock.
e.	The interest rate used to calculate the WACC is the average after-tax cost of all the company’s outstanding debt as shown on its balance sheet.

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finance quiz assistance cost of capital

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