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Chapter 14
Cost of Capital
Multiple Choice Questions
1.
A group of individuals got together and purchased all of the outstanding
shares of common stock of DL Smith, Inc. What is the return that these
individuals require on this investment called?
2.
Textile Mills borrows money at a rate of 13.5 percent. This interest rate is
referred to as the:
3.
The average of a firm's cost of equity and aftertax cost of debt that is
weighted based on the firm's capital structure is called the:
4.
When a manager develops a cost of capital for a specific project based on
the cost of capital for another firm which has a similar line of business as
the project, the manager is utilizing the _____ approach.
5.
A firm's cost of capital:
6.
The weighted average cost of capital for a wholesaler:
7.
Which one of the following is the primary determinant of a firm's cost of
capital?
8.
Scholastic Toys is considering developing and distributing a new board
game for children. The project is similar in risk to the firm's current
operations. The firm maintains a debt-equity ratio of 0.40 and retains all
profits to fund the firm's rapid growth. How should the firm determine its
cost of equity?
9.
All else constant, which one of the following will increase a firm's cost of
equity if the firm computes that cost using the security market line
approach? Assume the firm currently pays an annual dividend of $1 a share
and has a beta of 1.2.
10.
A firm's overall cost of equity is:
11.
The cost of equity for a firm:
12.
The dividend growth model can be used to compute the cost of equity for a
firm in which of the following situations?
I. firms that have a 100 percent retention ratio
II. firms that pay a constant dividend
III. firms that pay an increasing dividend
IV. firms that pay a decreasing dividend
13.
The dividend growth model:
14.
Which one of the following statements related to the SML approach to
equity valuation is correct? Assume the firm uses debt in its capital
structure.
15.
Which of the following statements are correct?
I. The SML approach is dependent upon a reliable measure of a firm's
unsystematic risk.
II. The SML approach can be applied to firms that retain all of their
earnings.
III. The SML approach assumes a firm's future risks are similar to its past
risks.
IV. The SML approach assumes the reward-to-risk ratio is constant.
16.
The pre-tax cost of debt:
17.
The aftertax cost of debt generally increases when:
I. a firm's bond rating increases.
II. the market rate of interest increases.
III. tax rates decrease.
IV. bond prices rise.
18.
The cost of preferred stock is computed the same as the:
19.
The cost of preferred stock:
20.
The capital structure weights used in computing the weighted average cost
of capital:
21.
Morris Industries has a capital structure of 55 percent common stock, 10
percent preferred stock, and 45 percent debt. The firm has a 60 percent
dividend payout ratio, a beta of 0.89, and a tax rate of 38 percent. Given
this, which one of the following statements is correct?
