FIN 300 PAPER ACTUAL QUESTIONS AND
ANSWERS SURE A+
✔✔When calculating the component cost of debt for capital budgeting purposes for
profitable, tax-paying firms, the tax adjustment: - ✔✔reduces the component cost of
debt
✔✔There is no tax effect to consider when calculating the component cost of preferred
stock for capital budgeting purposes. - ✔✔True
✔✔The cost of new common stock (external equity) is generally higher than the cost of
retained earnings (internal equity) because of - ✔✔flotation costs.
✔✔Which of the following is NOT considered a capital component for the purpose of
calculating the weighted average cost of capital (WACC) as it applies to capital
budgeting? - ✔✔Accounts payable and accruals.
✔✔The weighted average cost of capital for a given capital budget level is a weighted
average of the marginal cost of each relevant capital component that makes up the
firm's
target capital structure - ✔✔True
✔✔Which of the following will increase a company's retained earnings break point?
A ) An increase in its net income.
B ) An increase in its dividend payout.
C ) An increase in the amount of equity in its capital structure.
D ) All of the statements above are correct. - ✔✔An increase in its net income.
✔✔A firm estimates that its proposed capital budget will force it to issue new common
stock, which has a greater cost than the cost of retained earnings. The firm, however,
, would like to avoid issuing costly new common stock. Which of the following steps
would
mitigate the firms need to raise new common stock?
A ) Increasing the company's dividend payout ratio for the upcoming year.
B ) Reducing the company's debt ratio for the upcoming year.
C ) Increasing the company's proposed capital budget.
D ) None of the statements above is correct. - ✔✔None of the statements above is
correct.
✔✔The coupon rate on existing debt is usually:
a good estimate of the before-tax cost of new debt.
always higher than the before-tax cost of new debt
always lower than the before-tax cost of new debt
none of the above statements are true - ✔✔none of the above statements are true
✔✔Which of the following will increase a companys retained earnings break point?
An increase in its net income.
An increase in its dividend payout.
An increase in the amount of equity in its capital structure.
All of the statements above are correct. - ✔✔An increase in its net income.
✔✔Costly Corporation plans a new issue of bonds with a par value of $1000, a maturity
of 39 years, and an annual coupon rate of 15.0%. Flotation costs associated with a new
debt issue would equal 7.0% of the market value of the bonds. Currently, the
appropriate discount rate for bonds of firms similar to Costly is 19.0%. The firm's
marginal tax rate is 40%. What will the firm's true cost of debt be for this new bond
issue? - ✔✔12.26%
✔✔Costly Corporation is considering a new preferred stock issue. The preferred would
have a par value of $1000 with an annual dividend equal to 10.0% of par. The company
believes that the market value of the stock would be $954.00 per share with flotation
costs of $67.00 per share. The firm's marginal tax rate is 40%. What is the firm's cost of
preferred stock? - ✔✔11.27%
✔✔Costly Corporation is considering using equity financing. Currently, the firm's stock is
selling for $43.00 per share. The firm's dividend for next year is expected to be $4.70
with an annual growth rate of 8.0% thereafter indefinitely. If the firm issues new stock,
the flotation costs would equal 11.0% of the stock's market value. The firm's marginal
tax rate is 40%. What is the firm's cost of internal equity? - ✔✔18.93%
✔✔Costly Corporation is considering using equity financing. Currently, the firm's stock is
selling for $36.00 per share. The firm's dividend for next year is expected to be $4.80
ANSWERS SURE A+
✔✔When calculating the component cost of debt for capital budgeting purposes for
profitable, tax-paying firms, the tax adjustment: - ✔✔reduces the component cost of
debt
✔✔There is no tax effect to consider when calculating the component cost of preferred
stock for capital budgeting purposes. - ✔✔True
✔✔The cost of new common stock (external equity) is generally higher than the cost of
retained earnings (internal equity) because of - ✔✔flotation costs.
✔✔Which of the following is NOT considered a capital component for the purpose of
calculating the weighted average cost of capital (WACC) as it applies to capital
budgeting? - ✔✔Accounts payable and accruals.
✔✔The weighted average cost of capital for a given capital budget level is a weighted
average of the marginal cost of each relevant capital component that makes up the
firm's
target capital structure - ✔✔True
✔✔Which of the following will increase a company's retained earnings break point?
A ) An increase in its net income.
B ) An increase in its dividend payout.
C ) An increase in the amount of equity in its capital structure.
D ) All of the statements above are correct. - ✔✔An increase in its net income.
✔✔A firm estimates that its proposed capital budget will force it to issue new common
stock, which has a greater cost than the cost of retained earnings. The firm, however,
, would like to avoid issuing costly new common stock. Which of the following steps
would
mitigate the firms need to raise new common stock?
A ) Increasing the company's dividend payout ratio for the upcoming year.
B ) Reducing the company's debt ratio for the upcoming year.
C ) Increasing the company's proposed capital budget.
D ) None of the statements above is correct. - ✔✔None of the statements above is
correct.
✔✔The coupon rate on existing debt is usually:
a good estimate of the before-tax cost of new debt.
always higher than the before-tax cost of new debt
always lower than the before-tax cost of new debt
none of the above statements are true - ✔✔none of the above statements are true
✔✔Which of the following will increase a companys retained earnings break point?
An increase in its net income.
An increase in its dividend payout.
An increase in the amount of equity in its capital structure.
All of the statements above are correct. - ✔✔An increase in its net income.
✔✔Costly Corporation plans a new issue of bonds with a par value of $1000, a maturity
of 39 years, and an annual coupon rate of 15.0%. Flotation costs associated with a new
debt issue would equal 7.0% of the market value of the bonds. Currently, the
appropriate discount rate for bonds of firms similar to Costly is 19.0%. The firm's
marginal tax rate is 40%. What will the firm's true cost of debt be for this new bond
issue? - ✔✔12.26%
✔✔Costly Corporation is considering a new preferred stock issue. The preferred would
have a par value of $1000 with an annual dividend equal to 10.0% of par. The company
believes that the market value of the stock would be $954.00 per share with flotation
costs of $67.00 per share. The firm's marginal tax rate is 40%. What is the firm's cost of
preferred stock? - ✔✔11.27%
✔✔Costly Corporation is considering using equity financing. Currently, the firm's stock is
selling for $43.00 per share. The firm's dividend for next year is expected to be $4.70
with an annual growth rate of 8.0% thereafter indefinitely. If the firm issues new stock,
the flotation costs would equal 11.0% of the stock's market value. The firm's marginal
tax rate is 40%. What is the firm's cost of internal equity? - ✔✔18.93%
✔✔Costly Corporation is considering using equity financing. Currently, the firm's stock is
selling for $36.00 per share. The firm's dividend for next year is expected to be $4.80
