©JUSTTRACY EXAM SOLUTIONS
19/11/2024 2:50pm
Keen Chapter 11 Exam Questions And
Improved Responses
To compute the after-tax cost of debt you need to multiply the cost of debt by: - answers✔✔a
factor equal to one minus the marginal tax rate, or (1 - marginal tax rate).
The appropriate discount rate to use when evaluating capital budgeting projects using NPV is
the: - answers✔✔WACC.
A firm has a beta of 0.90. If market returns are 12% and the risk-free rate is 4%, the estimated
cost of equity is __________. - answers✔✔11.2%.
Cost of equity =
risk-free rate + beta(market return - risk-free rate)
So, the cost of equity = 4% + .90(12% - 4%) = 11.2%
One way to adjust for projects with different levels of risk is to compute the NPV using a
WACC computed with a: - answers✔✔project-specific beta.
Which of the following inputs is needed when you use the constant dividend growth model
(CDGM) to estimate the cost of equity? - answers✔✔Current stock price
Cost of Equity = (Div1/Pe)+g
The __________ is the rate of return a firm must earn on its investment in order to maintain
the market value of its stock. - answers✔✔cost of capital
The WACC represents the average __________ for the firm. - answers✔✔cost of financing
, ©JUSTTRACY EXAM SOLUTIONS
19/11/2024 2:50pm
A firm has issued 8% preferred stock, which sold for $100 per share par value. The flotation
costs of the stock equaled $3 and the firm's marginal tax rate is 40%. The cost of the
preferred stock is; - answers✔✔8.25%
Rps = $8/($100 - $3) = $8/$97 = .08247 or 8.25%
Which of the following should be used as the firm's cost of debt? - answers✔✔The yield to
maturity of the existing debt outstanding.
A tax adjustment must be made in determining the cost of: - answers✔✔Long-term deb
The effective cost of debt is: - answers✔✔less than the return paid to debt holders due to tax
benefits of interest paid
Since preferred stock dividends are fixed in the same manner of a coupon bond's interest
payment it is referred to as: - answers✔✔hybrid equity.
A firm has determined its cost of each source of capital and its optimal capital structure which
is comprised of the following sources;
Long-term debt = 45%, after-tax cost = 7%
Preferred stock = 15%, after-tax cost = 10%
Common stock equity = 40%, after-tax cost = 14%
19/11/2024 2:50pm
Keen Chapter 11 Exam Questions And
Improved Responses
To compute the after-tax cost of debt you need to multiply the cost of debt by: - answers✔✔a
factor equal to one minus the marginal tax rate, or (1 - marginal tax rate).
The appropriate discount rate to use when evaluating capital budgeting projects using NPV is
the: - answers✔✔WACC.
A firm has a beta of 0.90. If market returns are 12% and the risk-free rate is 4%, the estimated
cost of equity is __________. - answers✔✔11.2%.
Cost of equity =
risk-free rate + beta(market return - risk-free rate)
So, the cost of equity = 4% + .90(12% - 4%) = 11.2%
One way to adjust for projects with different levels of risk is to compute the NPV using a
WACC computed with a: - answers✔✔project-specific beta.
Which of the following inputs is needed when you use the constant dividend growth model
(CDGM) to estimate the cost of equity? - answers✔✔Current stock price
Cost of Equity = (Div1/Pe)+g
The __________ is the rate of return a firm must earn on its investment in order to maintain
the market value of its stock. - answers✔✔cost of capital
The WACC represents the average __________ for the firm. - answers✔✔cost of financing
, ©JUSTTRACY EXAM SOLUTIONS
19/11/2024 2:50pm
A firm has issued 8% preferred stock, which sold for $100 per share par value. The flotation
costs of the stock equaled $3 and the firm's marginal tax rate is 40%. The cost of the
preferred stock is; - answers✔✔8.25%
Rps = $8/($100 - $3) = $8/$97 = .08247 or 8.25%
Which of the following should be used as the firm's cost of debt? - answers✔✔The yield to
maturity of the existing debt outstanding.
A tax adjustment must be made in determining the cost of: - answers✔✔Long-term deb
The effective cost of debt is: - answers✔✔less than the return paid to debt holders due to tax
benefits of interest paid
Since preferred stock dividends are fixed in the same manner of a coupon bond's interest
payment it is referred to as: - answers✔✔hybrid equity.
A firm has determined its cost of each source of capital and its optimal capital structure which
is comprised of the following sources;
Long-term debt = 45%, after-tax cost = 7%
Preferred stock = 15%, after-tax cost = 10%
Common stock equity = 40%, after-tax cost = 14%
