Professional Documents
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(10-1) Capital
1.
FI
Answer: a EASY
FI
Answer: a EASY
The cost of capital used in capital budgeting should reflect the average cost
of the various sources of long-term funds a firm uses to acquire assets.
a. True
b. False
FI
Answer: b EASY
CI
Answer: b EASY
Bankston Corporation forecasts that if all of its existing financial policies are
followed, its proposed capital budget would be so large that it would have to
issue new common stock. Since new stock has a higher cost than retained
earnings, Bankston would like to avoid issuing new stock. Which of the
following actions would REDUCE its need to issue new common stock?
a. Increase the dividend payout ratio for the upcoming year.
b. Increase the percentage of debt in the target capital structure.
c. Increase the proposed capital budget.
d. Reduce the amount of short-term bank debt in order to increase the
current ratio.
e. Reduce the percentage of debt in the target capital structure.
CI
Answer: a EASY
Schalheim Sisters Inc. has always paid out all of its earnings as dividends,
hence the firm has no retained earnings. This same situation is expected to
persist in the future. The company uses the CAPM to calculate its cost of
equity, its target capital structure consists of common stock, preferred stock,
and debt. Which of the following events would REDUCE its WACC?
a. The market risk premium declines.
b. The flotation costs associated with issuing new common stock increase.
c. The companys beta increases.
d. Expected inflation increases.
e. The flotation costs associated with issuing preferred stock increase.
CI
Answer: a MEDIUM
LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its
below-average risk projects have a WACC of 8%, and its above-average risk
projects have a WACC of 12%. Which of the following projects (A, B, and C)
should the company accept?
a. Project B, which is of below-average risk and has a return of 8.5%.
b. Project C, which is of above-average risk and has a return of 11%.
c. Project A, which is of average risk and has a return of 9%.
d. None of the projects should be accepted.
e. All of the projects should be accepted.
(Comp.) WACC
7.
CI
Answer: d MEDIUM
CI
Answer: b EASY
Bosio Inc.'s perpetual preferred stock sells for $97.50 per share, and it pays
an $8.50 annual dividend. If the company were to sell a new preferred issue,
it would incur a flotation cost of 4.00% of the price paid by investors. What is
the company's cost of preferred stock for use in calculating the WACC?
a. 8.72%
b. 9.08%
c. 9.44%
d. 9.82%
e. 10.22%
CI
Answer: e EASY
Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of
capital. You have been provided with the following data: rRF = 4.10%; RPM =
5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of
equity from retained earnings?
a. 9.67%
b. 9.97%
c. 10.28%
d. 10.60%
e. 10.93%
CI
Answer: d MEDIUM
(10-7) WACC
11.
CI
Answer: c MEDIUM
e. 8.29%
(10-7) WACC and target cap. struc.
12.
CI
Answer: a MEDIUM