FNAN 522 CH 14 FINAL EXAM
WITH COMPLETE VERIFIED
SOLUTIONS
All else constant, which one of the following will increase a firm's
cost of equity if the firm computes that cost using the security
market line approach? Assume the firm currently pays an annual
dividend of $1 a share and has a beta of 1.2.
A. a reduction in the dividend amount
B. an increase in the dividend amount
C. a reduction in the market rate of return
D. a reduction in the firm's beta E. a reduction in the risk-free rate
E. a reduction in the risk-free rate
The aftertax cost of debt:
A. varies inversely to changes in market interest rates.
B. will generally exceed the cost of equity if the relevant tax rate is
zero.
C. will generally equal the cost of preferred if the tax rate is zero.
D. is unaffected by changes in the market rate of interest.
E. has a greater effect on a firm's cost of capital when the debt-
equity ratio increases.
E. has a greater effect on a firm's cost of capital when the debt-
equity ratio increases.
We have an expert-written solution to this problem!
Which one of the following statements is correct for a firm that uses
debt in its capital structure?
A. The WACC should decrease as the firm's debt-equity ratio
increases.
B. When computing the WACC, the weight assigned to the preferred
, stock is based on the coupon rate multiplied by the par value of the
preferred.
C. The firm's WACC will decrease as the corporate tax rate
decreases.
D. The weight of the common stock used in the computation of the
WACC is based on the number of shares outstanding multiplied by
the book value per share.
E. The WACC will remain constant unless a firm retires some of its
debt.
A. The WACC should decrease as the firm's debt-equity ratio
increases.
Justice, Inc. has a capital structure which is based on 30 percent
debt, 5 percent preferred stock, and 65 percent common stock. The
flotation costs are 11 percent for common stock, 10 percent for
preferred stock, and 7 percent for debt. The corporate tax rate is 37
percent. What is the weighted average flotation cost?
A. 8.97 percent
B. 9.48 percent
C. 9.62 percent
D. 9.75 percent
E. 10.00 percent
D. 9.75 percent
Western Wear is considering a project that requires an initial
investment of $274,000. The firm maintains a debt-equity ratio of
0.40 and has a flotation cost of debt of 8 percent and a flotation
cost of equity of 10.5 percent. The firm has sufficient internally
generated equity to cover the equity portion of this project. What is
the initial cost of the project including the flotation costs?
A. $280,409
B. $281,406
C. $288,005
D. $297,747
E. $302,762
A. $280,409
Electronics Galore has 950,000 shares of common stock outstanding
at a market price of $38 a share. The company also has 40,000
bonds outstanding that are quoted at 106 percent of face value.
WITH COMPLETE VERIFIED
SOLUTIONS
All else constant, which one of the following will increase a firm's
cost of equity if the firm computes that cost using the security
market line approach? Assume the firm currently pays an annual
dividend of $1 a share and has a beta of 1.2.
A. a reduction in the dividend amount
B. an increase in the dividend amount
C. a reduction in the market rate of return
D. a reduction in the firm's beta E. a reduction in the risk-free rate
E. a reduction in the risk-free rate
The aftertax cost of debt:
A. varies inversely to changes in market interest rates.
B. will generally exceed the cost of equity if the relevant tax rate is
zero.
C. will generally equal the cost of preferred if the tax rate is zero.
D. is unaffected by changes in the market rate of interest.
E. has a greater effect on a firm's cost of capital when the debt-
equity ratio increases.
E. has a greater effect on a firm's cost of capital when the debt-
equity ratio increases.
We have an expert-written solution to this problem!
Which one of the following statements is correct for a firm that uses
debt in its capital structure?
A. The WACC should decrease as the firm's debt-equity ratio
increases.
B. When computing the WACC, the weight assigned to the preferred
, stock is based on the coupon rate multiplied by the par value of the
preferred.
C. The firm's WACC will decrease as the corporate tax rate
decreases.
D. The weight of the common stock used in the computation of the
WACC is based on the number of shares outstanding multiplied by
the book value per share.
E. The WACC will remain constant unless a firm retires some of its
debt.
A. The WACC should decrease as the firm's debt-equity ratio
increases.
Justice, Inc. has a capital structure which is based on 30 percent
debt, 5 percent preferred stock, and 65 percent common stock. The
flotation costs are 11 percent for common stock, 10 percent for
preferred stock, and 7 percent for debt. The corporate tax rate is 37
percent. What is the weighted average flotation cost?
A. 8.97 percent
B. 9.48 percent
C. 9.62 percent
D. 9.75 percent
E. 10.00 percent
D. 9.75 percent
Western Wear is considering a project that requires an initial
investment of $274,000. The firm maintains a debt-equity ratio of
0.40 and has a flotation cost of debt of 8 percent and a flotation
cost of equity of 10.5 percent. The firm has sufficient internally
generated equity to cover the equity portion of this project. What is
the initial cost of the project including the flotation costs?
A. $280,409
B. $281,406
C. $288,005
D. $297,747
E. $302,762
A. $280,409
Electronics Galore has 950,000 shares of common stock outstanding
at a market price of $38 a share. The company also has 40,000
bonds outstanding that are quoted at 106 percent of face value.
