7) Assume preferred stock of Ford Motors pays a dividend of $4 each year and trades at a
price of $35. What is the cost of preferred stock capital for Ford?
A) 11.4%
B) 12.6%
C) 13.7%
D) 14.9%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
8) Assume preferred stock of Ford Motors pays a dividend of $3.50 each year and trades at
a price of $30. What is the cost of preferred stock capital for Ford?
A) 10.5%
B) 11.7%
C) 11.1%
D) 10.7%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
9) Assume preferred stock of Ford Motors pays a dividend of $3.00 each year and trades at
a price of $20. What is the cost of preferred stock capital for Ford?
A) 12.0%
B) 13.5%
C) 15.0%
D) 16.5%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
11
10) IBM expects to pay a dividend of $2 next year and expects these dividends to grow at
9% a year. The price of IBM is $80 per share. What is IBM‘s cost of equity capital?
A) 9.20%
B) 10.35%
C) 10.93%
D) 11.50%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
11) IBM expects to pay a dividend of $5 next year and expects these dividends to grow at
7% a year. The price of IBM is $90 per share. What is IBM‘s cost of equity capital?
A) 3.77%
B) 5.02%
C) 7%
D) 12.56%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
12) Assume IBM just paid a dividend of $4.50 and expects these dividends to grow at 8% a
year. The price of IBM is $100 per share. What is IBM’s cost of equity capital?
A) 3.86%
B) 8%
C) 12.22%
D) 12.86%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
13) Your estimate of the market risk premium is 7%. The risk-free rate of return is 4% and
General Motors has a beta of 1.6. What is General Motors’ cost of equity capital?
A) 15.2%
B) 14.4%
C) 16.0%
D) 13.7%
Cost of equity = 0.04 + (1.6 × 0.07) = 0.152 = 15.2%
Dif: 1 Var: 50+
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
14) Your estimate of the market risk premium is 6%. The risk-free rate of return is 4% and
General Motors has a beta of 1.4. What is General Motors’ cost of equity capital?
A) 11.2%
B) 12.4%
C) 11.8%
D) 13.0%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
15) Your estimate of the market risk premium is 9%. The risk-free rate of return is 4.1%
and General Motors has a beta of 1.8. What is General Motors’ cost of equity capital?
A) 20.3%
B) 18.3%
C) 19.3%
D) 21.3%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
13
16) A irm has outstanding debt with a coupon rate of 8%, seven years maturity, and a price
of $1,000. What is the after-tax cost of debt if the marginal tax rate of the irm is 35%?
A) 5.2%
B) 5.5%
C) 5.7%
D) 6.0%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
17) A irm has outstanding debt with a coupon rate of 8%, nine years maturity, and a price
of $1,000. What is the after-tax cost of debt if the marginal tax rate of the irm is 40%?
A) 3.8%
B) 4.8%
C) 4.3%
D) 4.4%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
18) A irm has outstanding debt with a coupon rate of 5%, ten years maturity, and a price of
$1,000. What is the after-tax cost of debt if the marginal tax rate of the irm is 35%?
A) 2.6%
B) 2.9%
C) 3.3%
D) 3.4%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
19) A irm has $1 million market value and it sells preferred stock with a par value of $100.
If the coupon rate on the preferred stock is 5% and the preferred stock trades at $91, what
is the cost of preferred stock capital?
A) 4.67%
B) 4.95%
C) 5.22%
D) 5.49%
Explanation: D)
Cost of preferred stock capital = (5% × $100) / $91 = 5.49%
Dif: 1 Var: 50+
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
20) A irm has $2 million market value and it sells preferred stock with a par value of $100.
If the coupon rate on the preferred stock is 6% and the preferred stock trades at $98, what
is the cost of preferred stock capital?
A) 5.82%
B) 6.12%
C) 6.43%
D) 6.73%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
21) A irm has $3 million market value and it sells preferred stock with a par value of $100.
If the coupon rate on the preferred stock is 8% and the preferred stock trades at $92, what
is the cost of preferred stock capital?
A) 8.26%
B) 8.70%
C) 9.13%
D) 9.57%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
22) An all-equity irm had a dividend expense of $30,000 last year. The market value of the
irm is $900,000 and the dividend is expected to increase at 6% each year. What is the cost
of equity for this irm?
A) 9.53%
B) 10.01%
C) 10.96%
D) 11.44%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
15
23) An all-equity irm had a dividend expense of $20,000 last year. The market value of the
irm is $600,000 and the dividend is expected to increase at 5% each year. What is the cost
of equity for this irm?
A) 6.80%
B) 7.65%
C) 8.50%
D) 9.35%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
24) An all-equity irm had a dividend expense of $45,000 last year. The market value of the
irm is $800,000 and the dividend is expected to increase at 7% each year. What is the cost
of equity for this irm?
A) 11.72%
B) 12.37%
C) 13.02%
D) 14.32%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
16
25) The outstanding debt of Berstin Corp. has ten years to maturity, a current yield of 7%,
and a price of $95. What is the pretax cost of debt if the tax rate is 30%.
A) 4.9%
B) 6.5%
C) 7.0%
D) 7.37%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
26) The outstanding debt of Berstin Corp. has ive years to maturity, a current yield of 6%,
and a price of $95. What is the pretax cost of debt if the tax rate is 30%.
A) 4.2%
B) 4.8%
C) 6.9%
D) more information needed
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
17
27) The outstanding debt of Berstin Corp. has eight years to maturity, a current yield of 7%,
and a price of $85. What is the pretax cost of debt if the tax rate is 40%?
A) 5.1%
B) 5.9%
C) 8.5%
D) more information needed
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
28) SIROM Scientiic Solutions has $10 million of outstanding equity and $5 million of bank
debt. The bank debt costs 5% per year. The estimated equity beta is 2. If the market risk
premium is 9% and the risk-free rate is 3%, compute the weighted average cost of capital if
the irm’s tax rate is 30%.
A) 15.17%
B) 15.93%
C) 16.68%
D) 17.44%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
18
29) SIROM Scientiic Solutions has $5 million of outstanding equity and $5 million of bank
debt. The bank debt costs 4% per year. The estimated equity beta is 2. If the market risk
premium is 8% and the risk-free rate is 4%, compute the weighted average cost of capital if
the irm’s tax rate is 35%.
A) 11.87%
B) 12.43%
C) 11.30%
D) 13.00%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
30) SIROM Scientiic Solutions has $12 million of outstanding equity and $4 million of bank
debt. The bank debt costs 4% per year. The estimated equity beta is 1. If the market risk
premium is 8% and the risk-free rate is 4%, compute the weighted average cost of capital if
the irm’s tax rate is 30%.
A) 8.73%
B) 9.22%
C) 9.70%
D) 10.67%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
19
31) A irm has a capital structure with $50 million in equity and $100 million of debt. The
cost of equity capital is 11% and the pretax cost of debt is 5%. If the marginal tax rate of
the irm is 40%, compute the weighted average cost of capital of the irm.
A) 4.5%
B) 5.1%
C) 5.67%
D) 6.5%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
32) A irm has a capital structure with $75 million in equity and $45 million of debt. The
cost of equity capital is 10% and the pretax cost of debt is 7%. If the marginal tax rate of
the irm is 40%, compute the weighted average cost of capital of the irm.
A) 6.7%
B) 7.0%
C) 7.8%
D) 8.6%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
33) A irm has a capital structure with $75 million in equity and $75 million of debt. The
cost of equity capital is 10% and the pretax cost of debt is 7%. If the marginal tax rate of
the irm is 35%, compute the weighted average cost of capital of the irm.
A) 7.3%
B) 7.6%
C) 8.0%
D) 8.4%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
34) A irm has a pre-tax cost of debt of 9.0%. If the irm has a marginal tax rate of 35%,
what is its efective cost of debt?
A) 5.9%
B) 4.1%
C) 9.4%
D) 9.1%