Chevron Finance Quiz 1

1) In order to recognize the interrelationship between financing and investments, a firm should use ________ when evaluating an investment.

• the least costly source of financing

• the most costly source of financing

• the weighted average cost of all financing sources

• the current opportunity cost

2) Nico Trading Corporation is considering issuing long-term debt. The debt would have a 30-year maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm's tax rate is 35 percent. Given this information, the after-tax cost of debt for Nico Trading would be ________.

• 7.26%

• 11.17%

• 10.00%

• 9.00%

What is the dividend on an 8 percent preferred stock that currently sells for $45 and has a face value of $50 per share?

• $3.33

• $3.60

• $4.00

• $5.00

The cost of common stock equity is ________.

• the cost of the guaranteed stated dividend expected by the stockholders

• the rate at which investors discount the expected dividends of the firm to determine its share value

• the after-tax cost of the interest obligations

• the historical cost of floating the stock issue

The cost of common stock equity may be estimated by using the ________.

• yield curve

• capital asset pricing model

• break-even analysis

• DuPont analysis

A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can ________.

• increase the proportion of long-term debt to decrease the cost of capital

• increase the proportion of short-term debt to decrease the cost of capital

• decrease the proportion of common stock equity to decrease financial risk

• increase the proportion of common stock equity to decrease financial risk

A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals 6 percent. The estimated cost of common stock equity is ________.

• 6 percent

• 7.2 percent

• 14 percent

• 15.6 percent

8) A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5 percent. The cost of the firm's common stock equity is ________.

• 5 percent

• 8 percent

• 10 percent

• 13 percent

A firm has common stock with a market price of $100 per share and an expected dividend of $5.61 per share at the end of the coming year. A new issue of stock is expected to be sold for $98, with $2 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total $1 per share. The dividends paid on the outstanding stock over the past five years are as follows:

The cost of this new issue of common stock is ________.

• 5.8 percent

• 7.7 percent

• 10.8 percent

• 12.8 percent

When discussing weighing schemes for calculating the weighted average cost of capital, ________.

• market value weights are preferred over book value weights and target weights are preferred over historical weights

• book value weights are preferred over market value weights and target weights are preferred over historical weights

• book value weights are preferred over market value weights and historical weights are preferred over target weights

• market value weights are preferred over book value weights and historical weights are preferred over target weights