FNAN 522 EXAM (CH 14) Questions All
Answered Correctly 2026-2027 Updated.
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 - Answer 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. - Answer
E. has a greater effect on a firm's cost of capital when the debt-equity ratio increases.
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. - Answer 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 - Answer 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 - Answer 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. What weight should be given to the debt when the firm computes its weighted average
cost of capital?
A. 42 percent
B. 46 percent
C. 50 percent
D. 54 percent
E. 58 percent - Answer D. 54 percent
Kelso's has a debt-equity ratio of 0.6 and a tax rate of 35 percent. The firm does not issue
preferred stock. The cost of equity is 14.5 percent and the aftertax cost of debt is 4.8 percent.
What is the weighted average cost of capital?
A. 10.46 percent
B. 10.67 percent
C. 10.86 percent
D. 11.38 percent
E. 11.57 percent - Answer C. 10.86 percent
Answered Correctly 2026-2027 Updated.
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 - Answer 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. - Answer
E. has a greater effect on a firm's cost of capital when the debt-equity ratio increases.
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. - Answer 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 - Answer 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 - Answer 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. What weight should be given to the debt when the firm computes its weighted average
cost of capital?
A. 42 percent
B. 46 percent
C. 50 percent
D. 54 percent
E. 58 percent - Answer D. 54 percent
Kelso's has a debt-equity ratio of 0.6 and a tax rate of 35 percent. The firm does not issue
preferred stock. The cost of equity is 14.5 percent and the aftertax cost of debt is 4.8 percent.
What is the weighted average cost of capital?
A. 10.46 percent
B. 10.67 percent
C. 10.86 percent
D. 11.38 percent
E. 11.57 percent - Answer C. 10.86 percent
