Question 1

Pacific Coast Fishing and Camping Stores Pty Ltd is considering opening a clothing store,which would be a new line of business for the company.Management has decided to use the cost of capital of a similar clothing store as the discount rate that should be used to evaluate this proposed expansion.Which one of the following terms is used to describe the approach Pacific Coast is taking to establish an appropriate discount rate for the project?

Accepted Answer

A)  subjective approach
B)  equity approach
C)  market play
D)  pure play approach
E)  after-tax approachF) None of the above
G) A) and B)

Question 2

In an efficient market,a security with a beta of 0.98 will have a rate of return which lies:

Accepted Answer

A)  on the SML just to the left of the market return
B)  just below the security market line (SML) and to the left of the market return
C)  above the SML just to the right of the market return
D)  on the SML just to the right of the market return
E)  just below the SML and to the right of the market returnF) B) and C)
G) None of the above

Question 3

A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions.By doing so,the firm:

Accepted Answer

A)  automatically maximises the total value created for its shareholders
B)  allocates capital funds evenly amongst its divisions
C)  encourages the division managers to only recommend their most conservative projects
D)  maintains the current risk level and capital structure of the firm
E)  automatically gives preferential treatment in the allocation of funds to its riskiest divisionF) A) and B)
G) C) and D)

Question 4

Which one of the following will affect the capital structure weights used to compute a firm's weighted average cost of capital?

Accepted Answer

A)  decrease in a firm's tax rate
B)  increase in the market risk premium
C)  increase in the market value of the firm's ordinary shares
D)  increase in the firm's beta
E)  decrease in the book value of a firm's equityF) B) and E)
G) C) and D)

Question 5

Which one of the following is a correct statement regarding a firm's weighted average cost of capital (WACC) ?

Accepted Answer

A)  The WACC will decrease when the tax rate decreases for all firms that utilise debt financing.
B)  A reduction in the risk level of a firm will tend to increase the firm's WACC.
C)  A 5 per cent increase in a firm's debt-equity ratio will tend to increase the firm's WACC.
D)  The WACC can be used as the required return for all new projects with similar risk to that of the existing firm.
E)  An increase in the market risk premium will tend to decrease a firm's WACC.F) B) and C)
G) C) and D)

Question 6

Pacific Coast Mining Pty Ltd,an Australian listed company,has 1 000 000 ordinary shares outstanding and the current market price per share is $13.The required rate of return for the ordinary shares is estimated to be 12%.They have issued bonds with a face value of $8 000 000 but the current market value based on a yield to maturity of 7.5% is $7 750 250.If the corporate tax rate is 30% what is the weighted average cost of capital assuming an imputation tax system? Assume all registered shareholders are Australian residents and all dividends are fully franked.

Accepted Answer

A)  7.22%
B)  10.32%
C)  9.48%
D)  6.83%
E)  9.75%F) B) and D)
G) D) and E)

Question 7

The PMP Insurance Company preference shares are trading on the ASX at $9 each and a dividend of 63 cents has just been paid.The face value of the issue is $10.What is the cost of preference shares for PMP?

Accepted Answer

A)  6.30%
B)  9.00%
C)  1.11%
D)  14.29%
E)  7.00%F) A) and E)
G) All of the above

Question 8

A firm that uses its weighted average cost of capital as the required return for all of its investments will:

Accepted Answer

A)  maintain a constant value for its shareholders
B)  increase the risk level of the firm over time
C)  make the best possible accept and reject decisions related to those investments
D)  find that its cost of capital declines over time
E)  accept only the projects that add value to the firm's shareholdersF) B) and D)
G) B) and E)

Question 9

The weighted average cost of capital is defined as the weighted average of a firm's:

Accepted Answer

A)  pre-tax cost of debt and equity securities
B)  dividend and capital gains yields
C)  cost of equity and its after-tax cost of debt
D)  bond coupon rates
E)  return on its investmentsF) C) and D)
G) A) and B)

Question 10

Which one of the following statements is correct related to the dividend growth model approach to computing the cost of equity?

Accepted Answer

A)  The annual dividend used in the computation must be for year one if you are using today's stock price to compute the return.
B)  The rate of growth must exceed the required rate of return.
C)  The cost of equity is equal to the return on the stock plus the risk-free rate.
D)  The cost of equity is equal to the return on the stock multiplied by the stock's beta.
E)  The rate of return must be adjusted for taxes.F) A) and E)
G) C) and D)

Question 11

The 7 per cent preferred stock of Winslow and Winslow is selling for $54 a share.What is the firm's cost of preferred shares (face value $100) ?

Accepted Answer

A)  12.96 per cent
B)  17.56 per cent
C)  3.78 per cent
D)  7.71 per cent
E)  18.52 per centF) A) and C)
G) A) and B)

Question 12

Rainbow Mining Pty Ltd is concerned that opening a new credit line will affect its share price.Now the company has a risk return on its shares of 17.50%,determined by using a beta factor of 1.50.The risk free rate is 7%.What is the market risk premium based on the information given for Rainbow Mining?

Accepted Answer

A)  11.86%
B)  5.50%
C)  7.00%
D)  17.50%
E)  10.50%F) C) and E)
G) A) and B)

Question 13

Which of the following features are advantages of the dividend growth model?
I.easy to understand
II.model simplicity
III.constant dividend growth rate
IV.model's applicability to all common stocks

Accepted Answer

A)  I and II only
B)  I,II and III only
C)  II only
D)  II and IV only
E)  I and III onlyF) B) and E)
G) A) and B)

Question 14

Musical Charts just paid an annual dividend of $2.45 per share.This dividend is expected to increase by 3.3 per cent annually.Currently,the firm has a beta of 1.09 and a stock price of $36 a share.The risk-free rate is 4.2 per cent and the market rate of return is 12.6 per cent.What is the cost of equity capital for this firm?

Accepted Answer

A)  12.29 per cent
B)  11.84 per cent
C)  10.28 per cent
D)  12.95 per cent
E)  13.42 per centF) B) and E)
G) A) and B)

Question 15

A firm has a return on equity of 12.4 per cent according to the dividend growth model and a return of 18.7 per cent according to the capital asset pricing model.The market rate of return is 13.5 per cent.What rate should the firm use as the cost of equity when computing the firm's WACC?

Accepted Answer

A)  13.5 per cent
B)  18.7 per cent because it is higher than 12.4 per cent
C)  The arithmetic average of 12.4 per cent,13.5 per cent,and 18.7 per cent
D)  12.4 per cent because it is lower than 18.7 per cent
E)  The arithmetic average of 12.4 per cent and 18.7 per centF) A) and C)
G) C) and D)

Question 16

Which one of the following represents the best estimate for a firm's pre-tax cost of debt?

Accepted Answer

A)  the current coupon on the firm's existing debt
B)  the firm's historical cost of capital
C)  the current yield on the firm's existing debt
D)  the current yield-to-maturity on the firm's existing debt
E)  twice the rate of return currently offered on risk-free securitiesF) A) and B)
G) A) and E)

Question 17

Black Stone Furnaces wants to build a new facility.The cost of capital for this investment is primarily dependent upon which one of the following?

Accepted Answer

A)  source of the funds used to build the facility
B)  firm's overall source of funds
C)  current tax rate
D)  the nature of the investment
E)  firm's historical average rate of returnF) None of the above
G) A) and B)

Question 18

Which one of the following represents the rate of return a firm must earn on its assets if it is to maintain the current value of its securities?

Accepted Answer

A)  debt-equity ratio
B)  after-tax cost of debt
C)  internal rate of return
D)  cost of equity
E)  weighted average cost of capitalF) A) and C)
G) B) and D)

Question 19

Horseless Carriages issued twenty-year,7 per cent semi-annual bonds eleven years ago.The bonds currently sell at 101.3 per cent of face value.What is the firm's after tax cost of debt if the tax rate is 34 per cent?

Accepted Answer

A)  4.49 per cent
B)  6.71 per cent
C)  4.87 per cent
D)  6.80 per cent
E)  6.83 per centF) A) and D)
G) A) and C)

Question 20

Nesquik and Newton have 75 000 shares outstanding.The stock is currently selling for $57 a share.The firm also has two bond issues outstanding.The first bond issue has a total face value of $500 000 and pays 8 per cent interest annually.This bond is selling at 102.4 per cent of face value.The second bond issue consists of 10 000 bonds which are selling for $990 each.These bonds pay 7 per cent interest annually and mature in 15 years.The cost of debt is 34 per cent.What is the capital structure weight of the firm's common stock?

Accepted Answer

A)  30.30 per cent
B)  33.33 per cent
C)  31.09 per cent
D)  29.11 per cent
E)  27.84 per centF) A) and D)
G) C) and E)

Exam 12: Long-Term Financing

Which one of the following will affect the capital structure weights used to compute a firm's weighted average cost of capital?

Correct Answer
verified

Correct Answer
verified

The 7 per cent preferred stock of Winslow and Winslow is selling for $54 a share.What is the firm's cost of preferred shares (face value $100) ?

Correct Answer
verified

Correct Answer
verified

Which one of the following represents the best estimate for a firm's pre-tax cost of debt?

Correct Answer
verified

Black Stone Furnaces wants to build a new facility.The cost of capital for this investment is primarily dependent upon which one of the following?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Which one of the following is a correct statement regarding a firm's weighted average cost of capital (WACC) ?

Correct Answer
verified

Correct Answer
verified

A firm that uses its weighted average cost of capital as the required return for all of its investments will:

Correct Answer
verified

Horseless Carriages issued twenty-year,7 per cent semi-annual bonds eleven years ago.The bonds currently sell at 101.3 per cent of face value.What is the firm's after tax cost of debt if the tax rate is 34 per cent?

Correct Answer
verified

Which one of the following statements is correct related to the dividend growth model approach to computing the cost of equity?

Correct Answer
verified

The weighted average cost of capital is defined as the weighted average of a firm's:

Correct Answer
verified

The PMP Insurance Company preference shares are trading on the ASX at $9 each and a dividend of 63 cents has just been paid.The face value of the issue is $10.What is the cost of preference shares for PMP?

Correct Answer
verified

Which one of the following represents the rate of return a firm must earn on its assets if it is to maintain the current value of its securities?

Correct Answer
verified

A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions.By doing so,the firm:

Correct Answer
verified

A firm has a return on equity of 12.4 per cent according to the dividend growth model and a return of 18.7 per cent according to the capital asset pricing model.The market rate of return is 13.5 per cent.What rate should the firm use as the cost of equity when computing the firm's WACC?

Correct Answer
verified

In an efficient market,a security with a beta of 0.98 will have a rate of return which lies:

Correct Answer
verified

Which of the following features are advantages of the dividend growth model? I.easy to understand II.model simplicity III.constant dividend growth rate IV.model's applicability to all common stocks

Correct Answer
verified

Exam 12: Long-Term Financing

Which one of the following will affect the capital structure weights used to compute a firm's weighted average cost of capital?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The 7 per cent preferred stock of Winslow and Winslow is selling for $54 a share.What is the firm's cost of preferred shares (face value $100) ?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following represents the best estimate for a firm's pre-tax cost of debt?

Correct AnswerverifiedShow Answer

Black Stone Furnaces wants to build a new facility.The cost of capital for this investment is primarily dependent upon which one of the following?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following is a correct statement regarding a firm's weighted average cost of capital (WACC) ?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A firm that uses its weighted average cost of capital as the required return for all of its investments will:

Correct AnswerverifiedShow Answer

Horseless Carriages issued twenty-year,7 per cent semi-annual bonds eleven years ago.The bonds currently sell at 101.3 per cent of face value.What is the firm's after tax cost of debt if the tax rate is 34 per cent?

Correct AnswerverifiedShow Answer

Which one of the following statements is correct related to the dividend growth model approach to computing the cost of equity?

Correct AnswerverifiedShow Answer

The weighted average cost of capital is defined as the weighted average of a firm's:

Correct AnswerverifiedShow Answer

The PMP Insurance Company preference shares are trading on the ASX at $9 each and a dividend of 63 cents has just been paid.The face value of the issue is $10.What is the cost of preference shares for PMP?

Correct AnswerverifiedShow Answer

Which one of the following represents the rate of return a firm must earn on its assets if it is to maintain the current value of its securities?

Correct AnswerverifiedShow Answer

A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions.By doing so,the firm:

Correct AnswerverifiedShow Answer

A firm has a return on equity of 12.4 per cent according to the dividend growth model and a return of 18.7 per cent according to the capital asset pricing model.The market rate of return is 13.5 per cent.What rate should the firm use as the cost of equity when computing the firm's WACC?

Correct AnswerverifiedShow Answer

In an efficient market,a security with a beta of 0.98 will have a rate of return which lies:

Correct AnswerverifiedShow Answer

Which of the following features are advantages of the dividend growth model? I.easy to understand II.model simplicity III.constant dividend growth rate IV.model's applicability to all common stocks

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified