Fin 310 Chapter 9 UPDATED ACTUAL
Exam Questions and CORRECT Answers
The ________ is the rate of return that a firm must earn on its investments in order to maintain
the market value of its stock. - CORRECT ANSWER - cost of capital
The ________ is the rate of return required by the market suppliers of capital in order to attract
their funds to the firm. - CORRECT ANSWER - cost of capital
The cost of capital reflects the cost of funds ________. - CORRECT ANSWER - over a
long-run time period
Although a firm's existing mix of financing sources may reflect its target capital structure, it is
ultimately ________. - CORRECT ANSWER - the marginal cost of capital that is relevant
for evaluating the firm's future investment opportunities
The ________ is a weighted average of the cost of funds which reflects the interrelationship of
financing decisions - CORRECT ANSWER - cost of capital
The ________ is the firm's desired optimal mix of debt and equity financing. - CORRECT
ANSWER - target capital structure
The cost to a firm of each type of capital is dependent upon ________. - CORRECT
ANSWER - the risk-free rate of each type of capital plus the business risk and the financial
risk of the firm
In order to recognize the interrelationship between financing and investments, a firm should use
________ when evaluating an investment. - CORRECT ANSWER - the weighted average
cost of all financing sources
The four basic sources of long-term funds for a firm are ________. - CORRECT
ANSWER - long-term debt, common stock, preferred stock, and retained earnings
, Which of the following is true of long-term funds? - CORRECT ANSWER - They are the
sources that supply the financing necessary to support a firm's capital budgeting activities.
Which of the following is a source of long-term funds? - CORRECT ANSWER - retained
earnings
Generally, the order of cost, from the least expensive to the most expensive, for long-term capital
of a corporation is ________. - CORRECT ANSWER - long-term debt, preferred stock,
retained earnings, new common stock
Generally the least expensive source of long-term capital is ________. - CORRECT
ANSWER - long-term debt
A tax adjustment must be made in determining the cost of ________. - CORRECT
ANSWER - long-term debt
The ________ from the sale of a security are the funds actually received from the sale after
________. - CORRECT ANSWER - net proceeds; reducing the flotation costs
The approximate before-tax cost of debt for a 15-year, 10 percent, $1,000 par value bond selling
at $950 is ________. - CORRECT ANSWER - 10.7 percent
The approximate before-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at
$1,150 is ________. - CORRECT ANSWER - 5.97 percent
The before-tax cost of debt for a firm, which has a marginal tax rate of 40 percent, is 12 percent.
The after-tax cost of debt is ________. - CORRECT ANSWER - 7.2 percent
The specific cost of each source of long-term financing is based on ________ and ________
costs. - CORRECT ANSWER - after-tax; current
Exam Questions and CORRECT Answers
The ________ is the rate of return that a firm must earn on its investments in order to maintain
the market value of its stock. - CORRECT ANSWER - cost of capital
The ________ is the rate of return required by the market suppliers of capital in order to attract
their funds to the firm. - CORRECT ANSWER - cost of capital
The cost of capital reflects the cost of funds ________. - CORRECT ANSWER - over a
long-run time period
Although a firm's existing mix of financing sources may reflect its target capital structure, it is
ultimately ________. - CORRECT ANSWER - the marginal cost of capital that is relevant
for evaluating the firm's future investment opportunities
The ________ is a weighted average of the cost of funds which reflects the interrelationship of
financing decisions - CORRECT ANSWER - cost of capital
The ________ is the firm's desired optimal mix of debt and equity financing. - CORRECT
ANSWER - target capital structure
The cost to a firm of each type of capital is dependent upon ________. - CORRECT
ANSWER - the risk-free rate of each type of capital plus the business risk and the financial
risk of the firm
In order to recognize the interrelationship between financing and investments, a firm should use
________ when evaluating an investment. - CORRECT ANSWER - the weighted average
cost of all financing sources
The four basic sources of long-term funds for a firm are ________. - CORRECT
ANSWER - long-term debt, common stock, preferred stock, and retained earnings
, Which of the following is true of long-term funds? - CORRECT ANSWER - They are the
sources that supply the financing necessary to support a firm's capital budgeting activities.
Which of the following is a source of long-term funds? - CORRECT ANSWER - retained
earnings
Generally, the order of cost, from the least expensive to the most expensive, for long-term capital
of a corporation is ________. - CORRECT ANSWER - long-term debt, preferred stock,
retained earnings, new common stock
Generally the least expensive source of long-term capital is ________. - CORRECT
ANSWER - long-term debt
A tax adjustment must be made in determining the cost of ________. - CORRECT
ANSWER - long-term debt
The ________ from the sale of a security are the funds actually received from the sale after
________. - CORRECT ANSWER - net proceeds; reducing the flotation costs
The approximate before-tax cost of debt for a 15-year, 10 percent, $1,000 par value bond selling
at $950 is ________. - CORRECT ANSWER - 10.7 percent
The approximate before-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at
$1,150 is ________. - CORRECT ANSWER - 5.97 percent
The before-tax cost of debt for a firm, which has a marginal tax rate of 40 percent, is 12 percent.
The after-tax cost of debt is ________. - CORRECT ANSWER - 7.2 percent
The specific cost of each source of long-term financing is based on ________ and ________
costs. - CORRECT ANSWER - after-tax; current
