FNAN 522 Exam (mod 4) Questions with
Quality Answers 2026-2027 Updated.
A company has a risk-free rate of 3% and a risk premium of 6%. Its tax rate is 35%. What is the
company's cost of debt? - Answer 5.85%
A company is thinking of issuing more common stock. Its stock's current market price is $50 a
share with an expected dividend annual one year from today of $3 a share. Dividends are
expected to grow 5% per year and there are no flotation costs. What is the company cost of
new common stock? - Answer 11.00%
A company has retained earnings of $1.5 million and net income of $8 million. What is the
retention ratio (expressed as a decimal)? - Answer 0.1875
A company makes an initial $10,000 investment in a project. This project is projected to earn
$8000 in year one, $10,000 in year 2, $12,000 in year 3, and $20,000 in year 4. If the WACC is
5%, what is the project's present value? - Answer $33,509
MV Corporation has debt with market value of $100 million, common equity with a book value
of $104 million, and preferred stock worth $17 million outstanding. Its common equity trades at
$55 per share, and the firm has 6.1 million shares outstanding. What weights should MV
Corporation use in its WACC? - Answer Weight for debt: 22.08%; weight for preferred stock:
3.75%; weight for common equity: 74.17%
Book Co. has 1.9 million shares of common equity with a par (book) value of $1.05, retained
earnings of $30.4 million, and its shares have a market value of $51.61 per share. It also has
debt with a par value of $21.5 million that is trading at 101% of par. What is the market value of
its equity? What is the market value of its debt? - Answer MV of equity: $98.06 million; MV of
debt: $21.72 million
Laurel, Inc., has debt outstanding with a coupon rate of 5.9% and a yield to maturity of 6.9%. Its
tax rate is 35%. What is Laurel's effective (after-tax) cost of debt?NOTE: Assume that the debt
has annual coupons. - Answer 4.49%
Dewyco has preferred stock trading at $49 per share. The next preferred dividend of $5 is due in
one year. What is Dewyco's cost of capital for preferred stock? - Answer 10.2%
Steady Company's stock has a beta of 0.25. If the risk-free rate is 5.9% and the market risk
premium is 7.2%, what is an estimate of Steady Company's cost of equity? - Answer 7.7%
, CoffeeCarts has a cost of equity of 15.4%, has an effective (aka after-tax) cost of debt of 3.5%,
and is financed 70% with equity and 30% with debt. What is this firm's WACC? - Answer 11.8%
Pfd Company has debt with a yield to maturity of 7.8%, a cost of equity of 12.9%, and a cost of
preferred stock of 8.9%. The market values of its debt, preferred stock, and equity are $10.4
million, $3.3 million, and $16.2 million, respectively, and its tax rate is 38%. What is this firm's
after-tax WACC? - Answer 9.65%
A company has issued preferred stock that are valued at $75 a share. The preferred dividend is
$5. The company's growth rate is 5%. What is the cost of the company's preferred stock? -
Answer 11.67%
A company is considering investing in a project that requires the company to take on risks
outside of the company's current scope. As a result, which of the following things will happen? -
Answer c. The company's stock value would drop unless the project increase the company's
expected returns.
A company issues common equity and has a beta of 1.5. The risk free return is 3% and the
market return is 7%. What is the company's cost of common equity? - Answer 9%
A company's cost of capital is used as a tool in relation to which aspect of financial policy? -
Answer Valuing projects by discounting cash flows, and then selecting projects with the
highest return.
In the capital asset pricing model (CAPM), you derive a stock's: - Answer Beta, expected return
(or cost of capital), and equity premium
Suppose that a company has total financing where 10% comes from bonds, 10% from a loan,
and 80% from shareholders equity. The bonds pay on average a 10% interest rate, the loan has a
10% interest rate, and shareholders require a 10% return. What is the weighted average cost of
capital (WACC) equal to? - Answer 0.1
The weighted average cost of capital weighting is based on _____. - Answer the market value
of the company's debt and equity.
Which of the following correctly explains how a specific factor can influence a company's
weighted average cost of capital? - Answer Increasing the amount of debt generally improves
performance and increases return on equity.
Which of the following interpretations of data related to a Security Market Line (SML) is correct?
- Answer If an asset's value lies on the SML, it is correctly priced.
Quality Answers 2026-2027 Updated.
A company has a risk-free rate of 3% and a risk premium of 6%. Its tax rate is 35%. What is the
company's cost of debt? - Answer 5.85%
A company is thinking of issuing more common stock. Its stock's current market price is $50 a
share with an expected dividend annual one year from today of $3 a share. Dividends are
expected to grow 5% per year and there are no flotation costs. What is the company cost of
new common stock? - Answer 11.00%
A company has retained earnings of $1.5 million and net income of $8 million. What is the
retention ratio (expressed as a decimal)? - Answer 0.1875
A company makes an initial $10,000 investment in a project. This project is projected to earn
$8000 in year one, $10,000 in year 2, $12,000 in year 3, and $20,000 in year 4. If the WACC is
5%, what is the project's present value? - Answer $33,509
MV Corporation has debt with market value of $100 million, common equity with a book value
of $104 million, and preferred stock worth $17 million outstanding. Its common equity trades at
$55 per share, and the firm has 6.1 million shares outstanding. What weights should MV
Corporation use in its WACC? - Answer Weight for debt: 22.08%; weight for preferred stock:
3.75%; weight for common equity: 74.17%
Book Co. has 1.9 million shares of common equity with a par (book) value of $1.05, retained
earnings of $30.4 million, and its shares have a market value of $51.61 per share. It also has
debt with a par value of $21.5 million that is trading at 101% of par. What is the market value of
its equity? What is the market value of its debt? - Answer MV of equity: $98.06 million; MV of
debt: $21.72 million
Laurel, Inc., has debt outstanding with a coupon rate of 5.9% and a yield to maturity of 6.9%. Its
tax rate is 35%. What is Laurel's effective (after-tax) cost of debt?NOTE: Assume that the debt
has annual coupons. - Answer 4.49%
Dewyco has preferred stock trading at $49 per share. The next preferred dividend of $5 is due in
one year. What is Dewyco's cost of capital for preferred stock? - Answer 10.2%
Steady Company's stock has a beta of 0.25. If the risk-free rate is 5.9% and the market risk
premium is 7.2%, what is an estimate of Steady Company's cost of equity? - Answer 7.7%
, CoffeeCarts has a cost of equity of 15.4%, has an effective (aka after-tax) cost of debt of 3.5%,
and is financed 70% with equity and 30% with debt. What is this firm's WACC? - Answer 11.8%
Pfd Company has debt with a yield to maturity of 7.8%, a cost of equity of 12.9%, and a cost of
preferred stock of 8.9%. The market values of its debt, preferred stock, and equity are $10.4
million, $3.3 million, and $16.2 million, respectively, and its tax rate is 38%. What is this firm's
after-tax WACC? - Answer 9.65%
A company has issued preferred stock that are valued at $75 a share. The preferred dividend is
$5. The company's growth rate is 5%. What is the cost of the company's preferred stock? -
Answer 11.67%
A company is considering investing in a project that requires the company to take on risks
outside of the company's current scope. As a result, which of the following things will happen? -
Answer c. The company's stock value would drop unless the project increase the company's
expected returns.
A company issues common equity and has a beta of 1.5. The risk free return is 3% and the
market return is 7%. What is the company's cost of common equity? - Answer 9%
A company's cost of capital is used as a tool in relation to which aspect of financial policy? -
Answer Valuing projects by discounting cash flows, and then selecting projects with the
highest return.
In the capital asset pricing model (CAPM), you derive a stock's: - Answer Beta, expected return
(or cost of capital), and equity premium
Suppose that a company has total financing where 10% comes from bonds, 10% from a loan,
and 80% from shareholders equity. The bonds pay on average a 10% interest rate, the loan has a
10% interest rate, and shareholders require a 10% return. What is the weighted average cost of
capital (WACC) equal to? - Answer 0.1
The weighted average cost of capital weighting is based on _____. - Answer the market value
of the company's debt and equity.
Which of the following correctly explains how a specific factor can influence a company's
weighted average cost of capital? - Answer Increasing the amount of debt generally improves
performance and increases return on equity.
Which of the following interpretations of data related to a Security Market Line (SML) is correct?
- Answer If an asset's value lies on the SML, it is correctly priced.
