Chapter 11: Determining the Cost of Capital
POINTS:
1
1. “Capital” is sometimes defined as funds supplied to a firm by investors.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.01 – LO: 11-1
NATIONAL STANDARDS:
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Capital
KEYWORDS:
DATE CREATED:
10/30/2017 8:06 PM
DATE MODIFIED:
2. The cost of capital used in capital budgeting should reflect the average cost of the various sources of long-term funds a
firm uses to acquire assets.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
HAS VARIABLES:
False
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
KEYWORDS:
DATE CREATED:
DATE MODIFIED:
1/6/2018 6:59 PM
3. The component costs of capital are market-determined variables in the sense that they are based on investors’ required
returns.
a.
True
b.
False
ANSWER:
True
POINTS:
1
QUESTION TYPE:
True / False
4. Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for
use in capital budgeting?
a.
Accounts payable.
b.
Common stock “raised” by reinvesting earnings.
c.
Common stock raised by new issues.
d.
Preferred stock.
e.
Long-term debt.
ANSWER:
a
1
DIFFICULTY:
Difficulty: Easy
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.01 – LO: 11-1
United States – BUSPROG: Analytic
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Capital components
OTHER:
TYPE: Multiple Choice: Conceptual
10/30/2017 8:06 PM
DATE MODIFIED:
1/6/2018 6:59 PM
5. The before-tax cost of debt, which is lower than the after-tax cost, is used as the component cost of debt for purposes of
developing the firm’s WACC.
a.
True
b.
False
ANSWER:
False
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.01 – LO: 11-1
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
TOPICS:
Component capital costs
KEYWORDS:
10/30/2017 8:06 PM
DATE MODIFIED:
1/6/2018 6:59 PM
1
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.03 – LO: 11-3
United States – BUSPROG: Reflective Thinking
capital
TOPICS:
Cost of debt
6. The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding
debt.
a.
True
b.
False
ANSWER:
False
1
DIFFICULTY:
Difficulty: Easy
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.03 – LO: 11-3
United States – BUSPROG: Reflective Thinking
capital
TOPICS:
Cost of debt
DATE CREATED:
10/30/2017 8:06 PM
1/6/2018 6:59 PM
7. The cost of debt is equal to one minus the marginal tax rate multiplied by the interest rate on new debt.
a.
True
b.
False
ANSWER:
True
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.03 – LO: 11-3
United States – BUSPROG: Reflective Thinking
capital
United States – OH – Default City – TBA
TOPICS:
Cost of debt
DATE CREATED:
10/30/2017 8:06 PM
DATE MODIFIED:
1/6/2018 6:59 PM
8. If a firm’s marginal tax rate is increased, this would, other things held constant, lower the cost of debt used to calculate
its WACC.
a.
True
b.
False
ANSWER:
True
1
DIFFICULTY:
Difficulty: Moderate
True / False
HAS VARIABLES:
False
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
After-tax cost of debt
KEYWORDS:
DATE CREATED:
10/30/2017 8:06 PM
1/6/2018 6:59 PM
9. Kenny Electric Company’s noncallable bonds were issued several years ago and now have 20 years to maturity. These
bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the
firm’s tax rate is 40%, what is the component cost of debt for use in the WACC calculation?
a.
b.
c.
d.
e.
ANSWER:
d
POINTS:
1
DATE CREATED:
10/30/2017 8:06 PM
1/6/2018 6:59 PM
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.11.03 – LO: 11-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
10. The Lincoln Company sold a $1,000 par value, noncallable bond several years ago that now has 20 years to maturity
and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $925 and the company’s tax rate is
40%. What is the component cost of debt for use in the WACC calculation?
a.
b.
c.
d.
e.
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.03 – LO: 11-3
United States – BUSPROG: Analytic
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Cost of debt
OTHER:
TYPE: Multiple Choice: Problem
10/30/2017 8:06 PM
DATE MODIFIED:
1/6/2018 6:59 PM
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.03 – LO: 11-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
TOPICS:
Taxes and cost of debt
KEYWORDS:
11. Westbrook’s Painting Co. plans to issue a $1,000 par value, 20-year noncallable bond with a 7.00% annual coupon,
paid semiannually. The company’s marginal tax rate is 40.00%, but Congress is considering a change in the corporate tax
rate to 30.00%. By how much would the component cost of debt used to calculate the WACC change if the new tax rate
was adopted?
a.
b.
c.
d.
e.
ANSWER:
POINTS:
1
LOCAL STANDARDS:
United States – OH – Default City – TBA
Cost of debt
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Problem
10/30/2017 8:06 PM
DATE MODIFIED:
1/6/2018 6:59 PM
Chapter 11: Determining the Cost of Capital
Collins Group
The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm’s weighted
average cost of capital. The balance sheet and some other information are provided below.
Assets
Current assets
$ 38,000,000
Net plant, property, and equipment
101,000,000
Total assets
$139,000,000
Liabilities and Equity
Accounts payable
$ 10,000,000
Accruals
9,000,000
Current liabilities
$ 19,000,000
Long-term debt (40,000 bonds, $1,000 par value)
40,000,000
Total liabilities
$ 59,000,000
Common stock (10,000,000 shares)
30,000,000
Retained earnings
50,000,000
Total shareholders’ equity
80,000,000
Total liabilities and shareholders’ equity
$139,000,000
The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with
semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the
yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an
average annual return of 14.50% during the past 5 years. The firm’s tax rate is 40%.
12. Refer to the data for the Collins Group. What is the best estimate of the after-tax cost of debt?
a.
b.
c.
d.
e.
ANSWER:
c
Coupon rate
Periods/year
Maturity (yr)
Bond price
Tax rate
Calculator inputs:
N = 2 × Years =
PMT = (Coupon rate × Par)/2 =
Yield = I/YR, which we solve for =
POINTS:
1
OTHER:
TYPE: Multiple Choice: Problem
10/30/2017 8:06 PM
DATE MODIFIED:
1/6/2018 6:59 PM
POINTS:
1
DIFFICULTY:
Difficulty: Easy
13. The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends received by a
corporation may be excluded from the receiving corporation’s taxable income.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
KEYWORDS:
DATE CREATED:
DATE MODIFIED:
1/6/2018 6:59 PM
14. The cost of perpetual preferred stock is found as the preferred’s annual dividend divided by the market price of the
preferred stock. No adjustment is needed for taxes because preferred dividends, unlike interest on debt, is not deductible
by the issuing firm.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
HAS VARIABLES:
False
PREFACE NAME:
Collins Group
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
KEYWORDS:
OTHER:
NOTES:
Keep problems referring to the Preface for the data for the Collins Group together.
DATE CREATED:
10/30/2017 8:06 PM
DATE MODIFIED:
15. Since 70% of the preferred dividends received by a corporation are excluded from taxable income, the component cost
of equity for a company that pays half of its earnings out as common dividends and half as preferred dividends should,
theoretically, be
Cost of equity = rs(0.30)(0.50) + rps(1 − T)(0.70)(0.50).
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.04 – LO: 11-4
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Cost of equity
KEYWORDS:
DATE CREATED:
10/30/2017 8:06 PM
DATE MODIFIED:
1/6/2018 6:59 PM
16. Perpetual preferred stock from Franklin Inc. sells for $97.50 per share, and it pays an $8.50 annual dividend. If the
company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is
the company’s cost of preferred stock for use in calculating the WACC?
a.
8.72%
b.
9.08%
c.
9.44%
d.
9.82%
e.
10.22%
ANSWER:
b
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.04 – LO: 11-4
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Cost of preferred stock
KEYWORDS:
DATE CREATED:
10/30/2017 8:06 PM
DATE MODIFIED:
1/6/2018 6:59 PM
Chapter 11: Determining the Cost of Capital
Difficulty: Easy
QUESTION TYPE:
False
IFMG.DAVE.19.11.04 – LO: 11-4
NATIONAL STANDARDS:
capital
United States – OH – Default City – TBA
TOPICS:
TYPE: Multiple Choice: Problem
POINTS:
1
Difficulty: Easy
QUESTION TYPE:
False
IFMG.DAVE.19.11.04 – LO: 11-4
NATIONAL STANDARDS:
capital
United States – OH – Default City – TBA
TOPICS:
TYPE: Multiple Choice: Problem
DATE CREATED:
1/6/2018 6:59 PM
17. A company’s perpetual preferred stock currently sells for $92.50 per share, and it pays an $8.00 annual dividend. If the
company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price. What is the firm’s
cost of preferred stock?
a.
b.
c.
d.
e.
ANSWER:
d
POINTS:
1
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Page 11
18. The cost of common equity obtained by retaining earnings is the rate of return the marginal stockholder requires on
the firm’s common stock.
a.
True
b.
False
ANSWER:
True
POINTS:
1
Difficulty: Easy
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.06 – LO: 11-6
capital
United States – OH – Default City – TBA
TOPICS:
Cost of common stock
DATE CREATED:
10/30/2017 8:06 PM
DATE MODIFIED:
1/6/2018 6:59 PM
19. For capital budgeting and cost of capital purposes, the firm should always consider reinvested earnings as the first
source of capital⎯i.e., use these funds first⎯because reinvested earnings have no cost to the firm.
a.
True
b.
False
ANSWER:
False
1
DIFFICULTY:
Difficulty: Easy
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.06 – LO: 11-6
United States – BUSPROG: Reflective Thinking
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Cost of common stock
DATE CREATED:
10/30/2017 8:06 PM
1/6/2018 6:59 PM
20. Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments
associated with them, and no flotation costs are required to raise them, but capital raised by selling new stock or bonds
does have a cost.
a.
True
b.
False
DATE MODIFIED:
1/6/2018 6:59 PM
Chapter 11: Determining the Cost of Capital
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.06 – LO: 11-6
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Cost of common stock
KEYWORDS:
DATE CREATED:
10/30/2017 8:06 PM
DATE MODIFIED:
1/6/2018 6:59 PM
21. The cost of equity raised by retaining earnings can be less than, equal to, or greater than the cost of external equity
raised by selling new issues of common stock, depending on tax rates, flotation costs, the attitude of investors, and other
factors.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Difficulty: Easy
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.06 – LO: 11-6
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Cost of common stock
KEYWORDS:
DATE CREATED:
10/30/2017 8:06 PM
DATE MODIFIED:
1/6/2018 6:59 PM
22. The firm’s cost of external equity raised by issuing new stock is the same as the required rate of return on the firm’s
outstanding common stock.
a.
True
b.
False
ANSWER:
False
Unfortunately, this is true.
POINTS:
1
Difficulty: Moderate
True / False
IFMG.DAVE.19.11.06 – LO: 11-6
23. The reason why reinvested earnings have a cost equal to rs is because investors think they can (i.e., expect to) earn rs
on investments with the same risk as the firm’s common stock, and if the firm does not think that it can earn rs on the
earnings that it retains, it should distribute those earnings to its investors. Thus, the cost of reinvested earnings is based on
the opportunity cost principle.
a.
True
b.
False
ANSWER:
True
1
Difficulty: Moderate
QUESTION TYPE:
False
LEARNING OBJECTIVES:
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
TOPICS:
DATE CREATED:
1/6/2018 6:59 PM
24. When estimating the cost of equity by use of the CAPM, three potential problems are (1) whether to use long-term or
short-term rates for rRF, (2) whether or not the historical beta is the beta that investors use when evaluating the stock, and
(3) how to measure the market risk premium, RPM. These problems leave us unsure of the true value of rs.
a.
True
b.
False
ANSWER:
True
IFMG.DAVE.19.11.06 – LO: 11-6
NATIONAL STANDARDS:
capital
LOCAL STANDARDS:
Cost of new common stock
KEYWORDS:
10/30/2017 8:06 PM
1/6/2018 6:59 PM
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.06 – LO: 11-6
25. The text identifies three methods for estimating the cost of common stock from reinvested earnings (not newly issued
stock): the CAPM method, the dividend growth method, and the bond-yield-plus-risk-premium method. However, only
the dividend growth method is widely used in practice.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.06 – LO: 11-6
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Cost of equity estimates
KEYWORDS:
DATE CREATED:
10/30/2017 8:06 PM
DATE MODIFIED:
1/6/2018 6:59 PM
26. If expectations for long-term inflation rose, but the slope of the SML remained constant, this would have a greater
impact on the required rate of return on equity, rs, than on the interest rate on long-term debt, rd, for most firms.
Therefore, the percentage point increase in the cost of equity would be greater than the increase in the interest rate on
long-term debt.
a.
True
b.
False
ANSWER:
False
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Cost of equity: CAPM
KEYWORDS:
DATE CREATED:
10/30/2017 8:06 PM
DATE MODIFIED:
1/6/2018 6:59 PM
POINTS:
1
Difficulty: Moderate
Multiple Choice
IFMG.DAVE.19.11.06 – LO: 11-6
27. If investors’ aversion to risk rose, causing the slope of the SML to increase, this would have a greater impact on the
required rate of return on equity, rs, than on the interest rate on long-term debt, rd, for most firms. Other things held
constant, this would lead to an increase in the use of debt and a decrease in the use of equity. However, other things would
not stay constant if firms used a lot more debt, as that would increase the riskiness of both debt and equity and thus limit
the shift toward debt.
a.
True
b.
False
ANSWER:
True
1
DIFFICULTY:
True / False
False
LEARNING OBJECTIVES:
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
TOPICS:
DATE CREATED:
1/6/2018 6:59 PM
28. When working with the CAPM, which of the following factors can be determined with the most precision?
a.
The beta coefficient, bi, of a relatively safe stock.
b.
The most appropriate risk-free rate, rRF.
c.
The expected rate of return on the market, rM.
d.
The beta coefficient of “the market,” which is the same as the beta of an average stock.
e.
The market risk premium (RPM).
ANSWER:
d
United States – OH – Default City – TBA
TOPICS:
10/30/2017 8:06 PM
DATE MODIFIED:
Copyright Cengage Learning. Powered by Cognero.
Page 16
29. Adams Inc. has the following data: rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is the firm’s cost of common from
reinvested earnings based on the CAPM?
a.
11.30%
b.
11.64%
c.
11.99%
d.
12.35%
e.
12.72%
POINTS:
1
Difficulty: Easy
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.11.06 – LO: 11-6
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
Cost of common: CAPM
KEYWORDS:
TYPE: Multiple Choice: Problem
10/30/2017 8:06 PM
DATE MODIFIED:
1/6/2018 6:59 PM
30. You have been hired as a consultant by Feludi Inc.’s CFO, who wants you to help her estimate the cost of capital. You
have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM approach,
what is the cost of common from reinvested earnings?
a.
9.67%
b.
9.97%
c.
10.28%
d.
10.60%
e.
10.93%
United States – OH – Default City – TBA
Cost of equity: CAPM
KEYWORDS:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:06 PM
1/6/2018 6:59 PM
Chapter 11: Determining the Cost of Capital
Copyright Cengage Learning. Powered by Cognero.
Page 17
1
Difficulty: Easy
Multiple Choice
False
IFMG.DAVE.19.11.06 – LO: 11-6
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Cost of common: CAPM
TYPE: Multiple Choice: Problem
10/30/2017 8:06 PM
1/6/2018 6:59 PM
Collins Group
The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm’s weighted
average cost of capital. The balance sheet and some other information are provided below.
Assets
Current assets
$ 38,000,000
Net plant, property, and equipment
101,000,000
Total assets
$139,000,000
Liabilities and Equity
Accounts payable
$ 10,000,000
Accruals
9,000,000
Current liabilities
$ 19,000,000
Long-term debt (40,000 bonds, $1,000 par value)
40,000,000
Total liabilities
$ 59,000,000
Common stock (10,000,000 shares)
30,000,000
Retained earnings
50,000,000
Total shareholders’ equity
80,000,000
Total liabilities and shareholders’ equity
$139,000,000
The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with
semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the
yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an
average annual return of 14.50% during the past 5 years. The firm’s tax rate is 40%.
31. Refer to the data for the Collins Group. Based on the CAPM, what is the firm’s cost of common stock?
a.
11.15%
b.
11.73%
c.
12.35%
Chapter 11: Determining the Cost of Capital
RATIONALE:
Unfortunately, this is true.
POINTS:
1
DIFFICULTY:
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.07 – LO: 11-7
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
LOCAL STANDARDS:
TOPICS:
Cost of equity: Dividend growth or discounted cash flow, DCF
KEYWORDS:
DATE CREATED:
10/30/2017 8:06 PM
d.
13.00%
e.
13.65%
ANSWER:
d
b
POINTS:
1
DIFFICULTY:
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
PREFACE NAME:
Collins Group
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.06 – LO: 11-6
NATIONAL STANDARDS:
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Cost of common: CAPM
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Multi-part
NOTES:
DATE CREATED:
10/30/2017 8:06 PM
DATE MODIFIED:
32. When estimating the cost of equity by use of the dividend growth method, the single biggest potential problem is to
determine the growth rate that investors use when they estimate a stock’s expected future rate of return. This problem
leaves us unsure of the true value of rs.
a.
True
b.
False
ANSWER:
True
33. As a consultant to Basso Inc., you have been provided with the following data: D1 = $0.67; P0 = $27.50; and gL =
8.00% (constant). What is the cost of common from reinvested earnings based on the dividend growth approach?
a.
9.42%
b.
9.91%
c.
10.44%
d.
10.96%
e.
11.51%
ANSWER:
g
POINTS:
1
QUESTION TYPE:
Multiple Choice
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.07 – LO: 11-7
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
TOPICS:
Cost of common: dividend growth model or discounted cash flow, DCF
KEYWORDS:
DATE CREATED:
10/30/2017 8:06 PM
34. To help them estimate the company’s cost of capital, Smithco has hired you as a consultant. You have been provided
with the following data: D1 = $1.45; P0 = $22.50; and gL = 6.50% (constant). Based on the dividend growth approach,
what is the cost of common from reinvested earnings?
a.
11.10%
b.
11.68%
c.
12.30%
d.
12.94%
e.
13.59%
ANSWER:
d
g
POINTS:
1
DATE MODIFIED:
1/6/2018 6:59 PM
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Page 20
35. To help estimate its cost of common equity, Maxwell and Associates recently hired you. You have obtained the
following data: D0 = $0.90; P0 = $27.50; and gL = 7.00% (constant). Based on the dividend growth model, what is the
cost of common from reinvested earnings?
a.
9.29%
b.
9.68%
c.
10.08%
d.
10.50%
e.
10.92%
ANSWER:
d
g
POINTS:
1
QUESTION TYPE:
Multiple Choice
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.07 – LO: 11-7
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
capital
TOPICS:
Cost of common: Dividend growth model, or discounted cash flow, DCF
KEYWORDS:
DATE CREATED:
10/30/2017 8:06 PM
36. As the assistant to the CFO of Johnstone Inc., you must estimate its cost of common equity. You have been provided
with the following data: D0 = $0.80; P0 = $22.50; and gL = 8.00% (constant). Based on the dividend growth model, what
QUESTION TYPE:
Multiple Choice
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.11.07 – LO: 11-7
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
TOPICS:
Cost of common: Dividend growth model, or discounted cash flow, DCF
KEYWORDS:
DATE CREATED:
10/30/2017 8:06 PM