Question 1 of 20 5.

0 Points
Financial capital does not include:

A. stock.
B. bonds.
C. preferred stock.
D. working capital.
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Answer: D
Question 2 of 20 5.0 Points
The overall weighted average cost of capital is used instead of costs for specific sources
of funds because:

A. use of the cost for specific sources of capital would make investment decisions
inconsistent.
B. a project with the highest return would always be accepted under the specific
cost criteria.
C. investments funded by low cost debt would have an advantage over other
investments.
D. Both A and C
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Answer: D
Question 3 of 20 5.0 Points
Debreu Beverages has an optimal capital structure that is 50% common equity, 40% debt,
and 10% preferred stock. Debreu’s pretax cost of equity is 12%. It’s pretax cost of
preferred equity is 7%, and it’s pretax cost of debt is also 7%. If the corporate tax rate is
35%, what is the weighed average cost of capital?

A. Between 7% and 8%
B. Between 8% and 9%
C. Between 9% and 10%
D. Between 10% and 12%
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Answer: B
Question 4 of 20 5.0 Points
For a firm paying 7% for new debt, the higher the firm's tax rate:

A. the higher the after-tax cost of debt.

B. the lower the after-tax cost of debt.
C. after-tax cost is unchanged.
D. Not enough information to judge.
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Answer: B
Question 5 of 20 5.0 Points
If a firm's bonds are currently yielding 8% in the marketplace, why would the firm's cost
of debt be lower?

A. Interest rates have changed.

B. Additional debt can be issued more cheaply than the original debt.
C. There should be no difference; cost of debt is the same as the bond's market
yield.
D. Interest is tax-deductible.
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Answer: D
Question 6 of 20 5.0 Points
A firm's cost of financing, in an overall sense, is equal to its:

A. weighted average cost of capital.

B. required yield that investors seek for various kinds of securities.
C. required rate of return that investors seek for various kinds of securities.
D. All of the above
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Answer: D
Question 7 of 20 5.0 Points
A firm has $25 million in assets and its optimal capital structure is 60% equity. If the firm
has $18 million in retained earnings, at what asset level will the firm need to issue
additional stock? (Assume no growth in retained earnings.)

A. The firm should have already issued additional stock.

B. The firm can increase assets to $30 million.
C. The firm can increase assets to $41.67 million.
D. There is insufficient information to determine an answer.
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Answer: A
Question 8 of 20 5.0 Points
The pre-tax cost of debt for a new issue of debt is determined by:

A. the investor's required rate of return on issued stock.

B. the coupon rate of existing debt.
C. the yield to maturity of outstanding bonds.
D. All of the above
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Answer: C
Question 9 of 20 5.0 Points
The cost of equity capital in the form of new common stock will be higher than the cost
of retained earnings because of:

A. the existence of taxes.

B. the existence of flotation costs.
C. investors' unwillingness to purchase additional shares of common stock.
D. the existence of financial leverage.
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Answer: B
Question 10 of 20 5.0 Points
If the flotation cost goes up, the cost of retained earnings will:
 A. go up.
B. go down.
C. stay the same.
D. slowly increase.
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Answer: C
Question 11 of 20 5.0 Points
Why is the cost of debt normally lower than the cost of preferred stock?

A. Preferred stock dividends are tax deductions.

B. Interest is tax deductible.
C. Preferred stock dividends must be paid before common stock dividends.
D. Common stock dividends are not tax deductible.
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Answer: B
Question 12 of 20 5.0 Points
If flotation costs go down, the cost of new preferred stock will:

A. go up.
B. go down.
C. stay the same.
D. slowly increase.
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Answer: B
Question 13 of 20 5.0 Points
A firm's debt to equity ratio varies at times because:

A. a firm will want to sell common stock when prices are high and bonds when
interest rates are low.
B. a firm will want to take advantage of timing its fund raising in order to
minimize costs over the long run.
 C. the market allows some leeway in the debt to equity ratio before penalizing the
firm with a higher cost of capital.
D. All of the above
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Answer: D
Question 14 of 20 5.0 Points
Using the constant dividend growth model for common stock, if Po goes up:

A. the assumed cost goes up.

B. the assumed cost goes down.
C. the assumed cost remains unchanged.
D. need further information
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Answer: B
Question 15 of 20 5.0 Points
New common stock is more expensive than Ke:

A. to compensate for risk.

B. to compensate for more dividends.
C. to compensate for expansionary problems.
D. to cover distribution costs.
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Answer: D
Question 16 of 20 5.0 Points
In computing the cost of common equity, if D1 goes downward and Po goes up, Ke will:

A. go up.
B. go down.
C. stay the same.
D. slowly increase.
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Answer: B
Question 17 of 20 5.0 Points
In determining the cost of retained earnings:

A. the dividend valuation model is inappropriate.

B. flotation costs are included.
C. growth is not considered.
D. the capital asset pricing model can be used.
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Answer: D
Question 18 of 20 5.0 Points
Within the capital asset pricing model:

A. the risk-free rate is usually higher than the return in the market.
B. the higher the beta the lower the required rate of return.
C. beta measures the volatility of an individual stock relative to a stock market
index.
D. None of the above
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Answer: C
Question 19 of 20 5.0 Points
Using the constant growth model, a firm’s expected (D1) dividend yield is 3% of the
stock price, and it’s growth rate is 7%. If the tax rate is .35%, what is the firm’s cost of
equity?

A. 10%
B. 6.65%
C. 8.95%
D. More information is required.
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Answer: A
Question 20 of 20 5.0 Points
For many firms, the cheapest and most important source of equity capital is in the form
of:

A. debt.
B. common stock.
C. preferred stock.
D. retained earnings.
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Answer: D