1-4 XX Company, which is interested in measuring its overall cost of capital and, has gathered the

following data. Under the terms described below, the company can sell unlimited amounts of all
intsruments.

> XX can raise cash by selling P1,000, 8%, 20-year bonds with annual interest payments. In
selling the issue, an average premium of P30 per bond would be received, and the firm must
pay flotation costs of P30 per bond. The after tas cost of funds is estimated to be 4.8 %

> XX can sell 8% preferred stock at P105 per share. The cost of issuing and selling the preferred
stock is expected to be P5 per share.
> XX's common stock is currently selling for P100 per share. The firms expects to pay cash
dividends of P7 per share next year, and the dividends are expected to remain constant. The
stock will be underpriced by P3 per share, and the flotation costs are expected to amount to
P5 per share.

> XX expected to have available P100,000 of retained earnings in the coming year. Once these
retained earnings are exhausted, the firm use common stock as the form of common equity
financing

> XX's preferred capital structure is

Long term debt - 30%
Preferred stock - 20%
Common Stock - 50%
1. The cost of funds from the sale of common stock for XX company is
A. 7.0% C. 7.4%
B. 7.6% D. 8.1%

2. The cost of funds from retained earnings for XX company is

A. 7.0% C. 7.4%
B. 7.6% D. 8.1%

3. If XX needs a total of P200,000, the firm's weighted average cost of capital would be
A. 19.8% C. 6.5%
B. 4.8% D. 6.8%

4. If XX needs a total P1,000,000 the firm's weighted average cost of capital would be
A. 6.8% C. 6.5%
B. 4.8% D. 27.4%

5-7 KBTX Telecom is considering a project for the coming year that will cost P50 million. The company
plans to use the following combination of debt and equity to finance the investment.
> Issue P15 million of 20-year bonds at a price of 101, with a coupon rate of 8% and flotation
cost of 2% of par.
> Use of P35 million of funds generated from earnings
> The equity market is expected to earn 12%. Philippine Treasury bills are currently yielding 5%.
The beta coeffient for KBTX is estimated to be 0.60. The company is subject to an effective
corporate income tax rate of 40%.

5. The before-tax cost of KBTX's planned debt financing, net of flotation costs, in the first year is
A. 11.6% C. 10.0%
B. 8.08% D. 7.92%
 6. Assume that the the after-tax cost of debt is 7% and the cost of equity is 12%. Determine the
weighted average cost of capital.
A. 10.5% C. 9.5%
B. 8.5% D. 6.3%

7. The capital asset pricing model computes the expected return on a security by adding the risk-free
rate of return to the incremental yield of expected market return, which is adjusted by the
company's beta. Compute the KBTX's expected rate of return using the CAPM

A. 9.2% C. 7.2%
B. 12.2% D. 12.0%

8. It refers to the practice of financing assets with borrowing capital. The extensive use may impact on
the return on common stickholders equity to be above or below the rate of return on total assets.
A. Cost of Capital C. Mortage
B. Leverage D. Arbitrage

9. HF Inc. has the following mix of funds and cost:

Type Amount Cost
Debt 15,000 18%
Preferred Stock 50,000 15%
Common Equity 70,000 12%

A. 12.22% C. 13.22%
B. 15.22% D. 13.78%

10. If a company has a higher dividend pay-out ratio, then, all else is equal, it will have
A. A higher marginal cost of capital
B. A lower marginal cost of capital
C. A higher investment opportunity schedule
D. A lower investment opportunity schedule

11. Which of the changes in leverage would apply to a company that substantially increases its
investments in fixed assets as a proportion of total assets and replaces some of its long-term debt
in equity?

Financial Leverage Operating Leverage

A. Increase Decrease
B. Decrease Increase
C. Increase Increase
D. Decrease Decrease

12. In its first year of operations, a firm had P500,000 of fixed operating cost. It sold 100,000 units at a
P10 unit price and incurred variable cost of P4 per unit. If all prices and cost will remain the same in
the second year and sales projected to rise to 250,000 units, what will be the degree of operating
leverage, (the extent to which fixed costs are used in the firms's operation) be in the second year?

A. 1.25 C. 2.00
B 1.50 D. 6.00
13-15 Bryan Company currently sells 400,000 bottles of perfumes each year. Each bottles costs P0.84 to
produce and sells P1.00. Fixed cost are P28,000 per year. The firm has annual interest expense of
P6,000, preferred stock dividends of P2,000 per year, and a 40% tax rate.

13. The degree of operating leverage for Bryan Company is

A. 2.40 C. 2.13
B 1.78 D. 1.35

14. The degree of financial leverage for Bryan Company is

A. 2.40 C. 2.13
B 1.78 D. 1.35

15. If Bryan Company did not have preferred stock, the degree of total leverage would.
A. Decrease in proportion to a decrease in financial leverage
B. Increase in proportion to a decrease in financial leverage
C. Remain the same
D. Decrease but not be proportional to the decrease in financial leverage

16. Treating dividends as the residual part of a financing decision assumes that
A. Earnings should be retained and reinvested as long as profitable projects are available
B. Dividends are important to shareholders, and any earnings left over after paying dividends
ahould be reinvested in high-return assets
C. Dividend payments should be consistent
D. Dividends are relevant to a financing decision

17. Treating dividends as an active policy strategy assumes that

A. Dividends are costly, and the firm should retain earnings and issue stock dividends
B. Dividends provide information to the market
C. Dividends are irrelevant
D. The firm should pay dividends only after investing in all investments opportunities having an
expected return greater than the cost of capital

18. In practice, dividends

A. Fluctuate more widely than earnings
B. Tend to be a lower percentage of earnings for mature firms.
C. Are usually changed every year to reflect earnings changed.
D. Usually exhibit greater stability than earnings

19. Liam Inc. expects net income of P800,000 for the next fiscal year. Its target and current capital
structure is 40% debt and 60% common equity. The director of capital budgeting has determined
that the optimal capital spending for the next year is P1.2 million. If Liam Inc. follows a strict
residual dividend policy, what is the expected dividend pay-out ratio next year?

A. 90.0% C. 40.0%
B 66.7% D. 10.0%

20. A stock dividend

A. Increases the debt-to-equity ratio to the firm
B. Decrease future earnings per share
 C. Decrease size of the firm
D. Increases shareholders wealth

21. When a company desires to increase the market value per share of common stock. The company
will implement.
A. The sale of treasury stock
B. A reverse stock split
C. A stock Split
D. The sale of preferred stock

22. AU Corporation has 6,000 shares of 5% cumulative, P100 par value preferred stock outstanding and
200,000 shares of common stock outstanding. AU's board of directors last declared dividends for
the year ended May 31, year 1. In year 3, AU has net income of P1,750,000. The board of directors
is declaring a dividend for the common shareholders equivalent to 20% of net income. The total
amount of dividends to be paid by FM at May 31, year 3, is

A. P350,000 C. P206,000
B. P380,000 D. P410,000

23. Each share of non participating, 8%, cumulative preferred stock in a company that meets its
dividend obligations has all of the following characteristics, except:
A. Voting rights in corporate elections
B. Dividend payments that are not tax deductible by the company
C. No principal repayments
D. A superior claim to common stock equity in the case of liquidation
.
24-25 IE Corporation projects the following for the year
EBIT P35 million
Interest expense P5 million
Preferred Stock Dividend P4 million
Common Stock dividend-payout ratio 30%
Common Stock outstanding 2 million
Effective corporate Income Tax 40%

24. The expected common stock dividend per share for IE Corporation is
A. P2.34 C. P1.80
B. P2.10 D. P2.70

25. If IE Corporation's common stock is expected to trade at a price-earnings ratio of 8, The market
proce per share is ( to the nearest peso)
A. P48 C. P104
B. P72 D. P56

26. US Company's last dividend was P4.50, its growth rate is 8% and the stock now sells for P70.
Flotation cost is P5.00. What is US cost of new common stock?
A. 6.92% C. 15.74%
B. 7.47% D. 15.48%
27. Nathan Corporation paid cash dividends to its common shareholder over the past 12 months of
P4.4 per share. The current market value of the common stocks is P100 per share, and investors are
anticipating the common dividends to grow at a rate of 7% annually. The cost of issue common
stocks will be 5% of the market value. The cost of a new common stocks issue will be.

A. 11.59% C. 11.79%
B. 11.69% D. 11.96%

28. The par value of common stock represents

A. The estimated value of stock when it was issued.
B. The total value of stock that must be entered in the issuing corporation's record
C. The liability ceiling of a shareholder when a company undergoes bankruptcy proceedings
D. A theoretical value of P100 per share of stock with any differences entered in the issuing
corporation's record as a discount or premium on common stock.
29. A firm's new financing will be in proportion to the market value of its current financing shown
below
Carrying Amount
Long term debt P7 million
Preferred Stock (100,000 shares) P1 million 10
Common Stock (200,000 shares) P7 million

The firm's bond are currently selling at the 80% of par, generatin a current market yield of 9%, and
the corporation has a 40% tax rate. The preferred stock is selling at its par value and pays a 6%
dividend, The common stock has a current market value of P40 and is expected to pay a P1.2 per
share this year. Dividend growth rate is expected to be 10% per year, and flotation costs are
negligible. What is the firm's weighted average cost of capital?

A. 5.40% C. 9.60%
B. 13.00% D. 7.12%

30. If two companies, Company E and Company K, are alike in all respects except that Company E
employs more debt financing and less equity financing than Company K does, which of the
following statements is true?

A. Company E has more net earnings variability than Company K

B. Company E has less operating earnings variability than Company K
C. Company E has more operating earnings variability than Company K
D. Company E has less financial leverage than Company K.
Expected dividend per share / (Market price per share, net - flotation cost)
7.61%

Expected dividend per share / Market price per share, gross

7.00%

COC %
Debt Equity 4.80% 30% 1.4400%
Preferred equity 8.00% 20% 1.6000%
Common Equity 7.00% 50% 3.5000% 6.5400%

Debt Equity 4.80% 30% 1.4400%

Preferred equity 8.00% 20% 1.6000%
Common Equity 7.61% 40% 3.0435%
Retained earnings 7.00% 10% 0.7000% 6.7835%

Cost of debt = before tax rate / MP net of flotation

8.08%
 COC %

Debt equity 7% 30% 2.100%

common equity 12% 70% 8.400% 10.500%

Cost of common equity = Risk free + Beta(Market rate - Risk free)

9.200%

Amount Cost %
15,000 18.00% 11.11% 2.00%
50,000 15.00% 37.04% 5.56%
70,000 12.00% 51.85% 6.22% 13.78%

Contribution Margin 1,500,000

Fixed cost 500,000
Operating income 1,000,000 1.5

Contribution Margin 64000

Fixed cost 28000
Operating income 36000 1.7777777778

EBIT/(EBIT-IE-PDBT)
1.35

Net Income 800,000.00

Common Equity 720,000.00
Earnings available for dividend 80,000.00 10%
Preferred Dividend Arrears 30,000.00

Current 30,000.00
Common Dividends 350,000.00 410,000.00

EBIT 35
IE 5
PSD 4
Tax 12
Earnings Available to common stocks 14
Dividend payout ratio 30%
Distributed to common stock 4.2
CS outstanding 2
Dividend per share 2.1

Price earning ratio = MPPS/EPS

MPS = EPS*PER
56

15.48%
 11.96%

MV COC

Long term debt 5,600 5.400% 38.36% 2.071%

Preferred Stock 1,000 6.000% 6.85% 0.411%
Common Stock 8,000 13.300% 54.79% 7.288%
14,600 9.77%
Div
Par