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The correct answer for each question is indicated by a . The interest rate that should be used when evaluating a capital investment project is sometimes called the. INCORRECT I. internal rate of return II. appropriate discount rate III. cost of capital A)I only B)II only C)III only D)I, II, and III E)II and III only Feedback: See page(s) 457 in your textbook. You need to calculate the cost of equity capital for a firm that is traded on the Toronto Stock Exchange. Which of the following would likely be least helpful to you? A)Knowledge of the stock's price six months ago. B)The rate of return on stocks of similar risk. C)An investment publication that provides an estimate of the firm's beta. D)An investment survey that projects future dividend growth rates for the firm. E)A data set containing dividends paid for the past ten years. Feedback: See page(s) 458,459,461,462 in your textbook. INCORRECT All else the same, a higher corporate tax rate __________. A)will increase the WACC of a firm with debt and equity in its capital structure B)will decrease the WACC of a firm with equity in its capital structure only C)will not affect the WACC of a firm with debt in its capital structure D)will decrease the WACC of a firm with some debt in its capital structure E)will change the WACC of a firm with debt in its capital structure, but the direction is unknown. Feedback: See page(s) 467 in your textbook.

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INCORRECT The cost of capital in a firm that has both debt and equity __________. A)is equal to the cost of debt or equity, depending on which type of financing the firm uses more B)depends on the source of the funds for a project C)is what a firm must earn on a project to compensate investors for the use of their funds D)is also known as the internal rate of return E)will be the same for its different divisions Feedback: See page(s) 457 in your textbook. INCORRECT Which of the following is NOT generally considered to be a problem when

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estimating the cost of equity? A)We must estimate beta using historical information. B)We must estimate the risk-free rate of interest. C)We must estimate the market risk premium. D)We must estimate a dividend growth rate. E)If we use the dividend growth model, we cannot adjust for differences in risk. Feedback: See page(s) 461,462 in your textbook. Topstone Industries' preferred stock pays an annual dividend of $4.00 per share. INCORRECT When issued, the shares sold for their par value of $100 per share. What is the cost of preferred stock if the current price is $125 per share? A)31.3% B)3.7% C)4.0% D)4.7% E)3.2% Feedback: See page(s) 464 in your textbook. Treasury bills currently have a return of 3.5% and the market risk premium is 8%. If a firm has a beta of 1.6, what is its cost of equity? A)18.8% B)16.3% C)12.8% D)10.7% E)8.8% Feedback: See page(s) 461 in your textbook. Given the following information, what is JEM Inc.'s weighted average cost of capital? Market value of equity = $50 million; market value of debt = $30 INCORRECT million; cost of equity = 16%; cost of debt = 8%; equity beta = 1.25; tax rate = 34%. A)11.29% B)11.45% C)11.98% D)12.32% E)13.00% Feedback: See page(s) 467 in your textbook. Your firm is considering a project which requires an initial investment of $5 million. Your target D/E ratio is 0.67. Flotation costs for equity are 8% and INCORRECT flotation costs for debt are 2%. What is the true cost (in dollars) of the project when you consider flotation costs? A)$5.10 million B)$5.28 million C)$5.00 million D)$5.61 million E)$5.40 million Feedback: See page(s) 474,475 in your textbook.

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A proposed project lasts 3 years and has an initial investment of $200,000. The aftertax cash flows are estimated at $60,000 for year 1, $120,000 for year 2, INCORRECT and $135,000 for year 3. The firm has a target debt/equity ratio of 1.2. The firm's cost of equity is 14% and its cost of debt is 9%. The tax rate is 34%. What is the NPV of this project? A)-$12,370 B)$37,723 C)$13,687 D)$57,185 E)$46,120 Feedback: See page(s) 467,468 in your textbook.

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Which of the following is true regarding the use of the dividend growth model for INCORRECT estimating the cost of equity capital? A)The model cannot be used for firms that do not currently pay dividends. B)One method of estimating future growth rates is the use of historical growth rates. C)The results from this model are not sensitive to changes in the dividend growth rate. D)The model works particularly well for companies that maintain a mostly unsteady dividend growth rate. E)The model explicitly considers risk. Feedback: See page(s) 461 in your textbook. A firm that uses its WACC as a cutoff without considering project risk: I. Tends to become less risky over time. INCORRECT II. Tends to accept negative NPV projects over time. III. Tends to reject positive NPV projects over time. A)II only B)II and III only C)I and III only D)I and II only E)I, II and III Feedback: See page(s) 471 in your textbook. INCORRECT We can estimate a firm's cost of debt by: A)observing the firm's bank borrowing rate on short-term loans B)observing the coupon rate on the firm's outstanding bonds C)observing the yield to maturity on newly-issued debt of other firms without regard to risk D)observing the risk-free rate and adding a risk premium to the

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coupon rate of existing debt E)observing the yield to maturity on the firm's outstanding bonds Feedback: See page(s) 464 in your textbook. Suppose that Topstone Industries has a cost of equity of 14% and a cost of debt of 9%. If the target debt/equity ratio is 75%, and the tax rate is 34%, what is Topstone's weighted average cost of capital (WACC)? A)10.6% B)7.9% C)8.4% D)6.6% E)10.9% Feedback: See page(s) 467 in your textbook. Rattle me Bones, Inc.'s common stock is currently selling for $66.25 per share. You expect the next dividend to be $5.30 per share. If the firm has a dividend INCORRECT growth rate of 4% that is expected to remain constant indefinitely, what is the firm's cost of equity? A)14.1% B)13.9% C)13.5% D)12.3% E)12.0% Feedback: See page(s) 458 in your textbook. RMB, Inc. sold a 20-year bond at par 12 years ago. The bond pays an 8% INCORRECT annual coupon, has a $1,000 face value, and currently sells for $893.30. What is the firm's cost of debt? A)8.0% B)9.2% C)9.5% D)10.0% E)10.5% Feedback: See page(s) 464 in your textbook. Anthony's Antiques, Inc. has preferred stock outstanding which pays a dividend of $4 per share a year. The current stock price is $32 per share. What is the cost of preferred stock? A)12.5% B)11.0% C)10.0% D)9.0% E)8.0% Feedback: See page(s) 464 in your textbook. KCE Co. is operating at its target capital structure with market values of $110 million in equity and $175 million in debt outstanding. KCE plans to finance a INCORRECT new $32 million project using the same relative weights of debt and equity. Ignoring flotation costs, how much new debt must be issued to fund the project? A)$12.4 million B)$18.5 million

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C)$19.6 million D)$24.8 million E)$32.0 million Feedback: See page(s) 465 in your textbook. Roberts Co.'s zero coupon bonds mature in 22 years and have a yield to maturity of 12.01%. Each zero has a face value of $1,000 and there are 2,000 INCORRECT of the bonds outstanding. If the market value of Roberts' equity is $1,000,000, what capital structure weight for debt would you use in computing the WACC, assuming Roberts' only debt consists of the zeros? A)11.9% B)18.9% C)15.8% D)14.2% E)66.7% Feedback: See page(s) 466 in your textbook. The common stock of Tommy's Tools sells for $27.50. The firm's beta = 1.2, the risk-free rate is 4%, and the market risk premium is 8%. Next year's dividend is INCORRECT expected to be $1.50. Assuming that dividend growth is expected to remain constant for Tommy's over the foreseeable future, what is the firm's anticipated dividend growth rate? A)7.6% B)8.2% C)7.8% D)9.2% E)10.1% Feedback: See page(s) 462 in your textbook.

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