Financial Management – Final Exam Study Guide and
Practice Questions
A firm's overall cost of capital that is a blend of the costs of the different sources of capital is
known as the firm's ________. - correct answer ✔✔ weighted average cost of capital
An unlevered firm is financed ____________________ . - correct answer ✔✔ only by equity
The outstanding bonds of Roblox Corp. have ten years to maturity, 6.65% coupon rate, annual
coupon, and a price of $95 per $100 face value. What is the estimate of the pretax cost of debt
if the tax rate is 30%? - correct answer ✔✔ nper = 10*2 = 20
pmt = 100*0.0065*0.5 = 3.325
pv = -95
fv = 100
=RATE(nper, pmt, pv, fv)
7.37%
Outstanding debt of Home Depot trades with a yield to maturity of 8%. The tax rate of Home
Depot is 20%. What is the effective cost of debt of Home Depot? - correct answer ✔✔ Effective
cost of debt = yield to maturity*(1- tax rate)
=(0.08*(1-.20))*100
=6.4%
, Assume preferred stock of Ford Motors pays a dividend of $4 each year and trades at a price of
$47. What is the cost of preferred stock capital for Ford? - correct answer ✔✔ Cost of preferred
stock = dividend / price
= () * 100
= 8.51%
IBM expects to pay a dividend of $6.52 next year and you expect these dividends to grow at 4%
a year into indefinite future. The price of IBM is $117 per share. What is your estimate of the
IBM's cost of equity capital? - correct answer ✔✔ Cost of equity = (dividend per share/ current
market value) + growth rate of dividend
=((6.52/ 117) + 0.04) * 100
= 9.57%
Your estimate of the market risk premium is 6%. The risk-free rate of return is 1% and General
Motors has a beta of 1.6. What is General Motors' cost of equity capital under these
assumptions? - correct answer ✔✔ Cost of equity = risk-free rate of return + beta*market risk
premium
= 1+(1.6*6)
= 10.6%
Assume Dominion Energy is discussing new ways to recapitalize the firm and raise additional
capital. The market values of its capital sources are $70.1 billion in equity, $37.9 billion in debt
and $2.4 billion in preferred stock . The cost of equity capital is 3.4%, the cost of preferred stock
is 3.2%, and the pretax cost of debt is 1.9%. What is the weighted average cost of capital for
Dominion Energy if its marginal tax rate is 25%? - correct answer ✔✔ Value of the firm = $70.1
billion + $37.9 billion + $2.4 billion
= $110.40 billion
Weight of debt = $37.9 billion / $110.40 billion
= 0.3433
Practice Questions
A firm's overall cost of capital that is a blend of the costs of the different sources of capital is
known as the firm's ________. - correct answer ✔✔ weighted average cost of capital
An unlevered firm is financed ____________________ . - correct answer ✔✔ only by equity
The outstanding bonds of Roblox Corp. have ten years to maturity, 6.65% coupon rate, annual
coupon, and a price of $95 per $100 face value. What is the estimate of the pretax cost of debt
if the tax rate is 30%? - correct answer ✔✔ nper = 10*2 = 20
pmt = 100*0.0065*0.5 = 3.325
pv = -95
fv = 100
=RATE(nper, pmt, pv, fv)
7.37%
Outstanding debt of Home Depot trades with a yield to maturity of 8%. The tax rate of Home
Depot is 20%. What is the effective cost of debt of Home Depot? - correct answer ✔✔ Effective
cost of debt = yield to maturity*(1- tax rate)
=(0.08*(1-.20))*100
=6.4%
, Assume preferred stock of Ford Motors pays a dividend of $4 each year and trades at a price of
$47. What is the cost of preferred stock capital for Ford? - correct answer ✔✔ Cost of preferred
stock = dividend / price
= () * 100
= 8.51%
IBM expects to pay a dividend of $6.52 next year and you expect these dividends to grow at 4%
a year into indefinite future. The price of IBM is $117 per share. What is your estimate of the
IBM's cost of equity capital? - correct answer ✔✔ Cost of equity = (dividend per share/ current
market value) + growth rate of dividend
=((6.52/ 117) + 0.04) * 100
= 9.57%
Your estimate of the market risk premium is 6%. The risk-free rate of return is 1% and General
Motors has a beta of 1.6. What is General Motors' cost of equity capital under these
assumptions? - correct answer ✔✔ Cost of equity = risk-free rate of return + beta*market risk
premium
= 1+(1.6*6)
= 10.6%
Assume Dominion Energy is discussing new ways to recapitalize the firm and raise additional
capital. The market values of its capital sources are $70.1 billion in equity, $37.9 billion in debt
and $2.4 billion in preferred stock . The cost of equity capital is 3.4%, the cost of preferred stock
is 3.2%, and the pretax cost of debt is 1.9%. What is the weighted average cost of capital for
Dominion Energy if its marginal tax rate is 25%? - correct answer ✔✔ Value of the firm = $70.1
billion + $37.9 billion + $2.4 billion
= $110.40 billion
Weight of debt = $37.9 billion / $110.40 billion
= 0.3433
