FINAL LONG QUIZ - FIN MAN

When evaluating an investment, which option should a firm choose to maximize its benefits?

• the least costly source of financing

• the most costly source of financing

• the weighted average cost of all financing sources

• the current opportunity cost

Which financing source should a firm 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

Choose the right statement from the following:

• Cost of debt is always higher than cost of equity

• Cost of debt is always lower than cost of equity

• Cost of debt can be higher or lower than cost of equity

• When company doesn't pay dividend, the cost of equity is zero

The average of a firm's cost of equity and after tax cost of debt that is weighted based on the firm's capital structure is called the:

• weighted capital gains rate.

• structured cost of capital.

• subjective cost of capital

• weighted average cost of capital.

Assume that ABC Corporation has the following capital structure: 30 percent debt,10 percent preferred stock, and 60 percent common stock. ABC Corporation wishes to maintain these proportions as it raises new funds. Its before-tax cost of debt is 8 percent, its cost of preferred stock is 10 percent, and its cost of equity is 15 percent.

If the company’s marginal tax rate is 40 percent, what is ABC’s weighted average cost of capital?

• 12.30%

• 11.44%

• 10.44%

• 13.78%

If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to:

I. reject some positive net present value projects.

II. accept some negative net present value projects.

III. favor high risk projects over low risk projects.

IV. increase its overall level of risk over time.

• I and III only

• III and IV only

• I, II, and III only

• I, II, III, and IV

Chelsea Fashions is expected to pay an annual dividend of $0.80 a share next year. The market price of the stock is $22.40 and the growth rate is 5 percent. What is the firm's cost of equity?

• 7.58 percent

• 7.91 percent

• 8.24 percent

• 8.57 percent

Sweet Treats common stock is currently priced at $19.06 a share. The company just paid $1.15 per share as its annual dividend. The dividends have been increasing by 2.5 percent annually and are expected to continue doing the same. What is the cost of equity for Sweet Treats?

• 6.03 percent

• 6.18 percent

• 8.47 percent

• 8.68 percent

A company has paid a dividend of 10c for many years.

The company expects to continue paying dividends at this level in the future.

The company’s current share price is $1.50.

Calculate the cost of equity.

• 6%

• 7.66%

• 6.67%

• 7.77%

P Co has just paid a dividend of 10c.

Shareholders expect dividends to grow at 7% pa. P Co’s current share price is $2.05 ex div.

Calculate the cost of equity of P Co.

• 11.21%

• 3.1%

• 10%

• 12.21%