Chapter 11 Smartbook -- Finance

Select all that apply The cost of new common stock is different from the cost of Blank______ because of the flotation costs involved. Multiple select question. common stock retained earnings debt preferred stock

common stock retained earnings

As long as the firm's required rate of return is met the firm will be able to maintain or increase the Multiple choice question. book value of the firm common stock value bond value preferred stock value

common stock value

The cost of retained earnings is equal to the Multiple choice question. cost of common equity cost of borrowing cost of preferred stock cost of debt

cost of common equity

An optimal capital structure represents a particular debt-equity ratio that Blank______ the weighted average cost of capital (WACC). Multiple choice question. minimizes increases reduces leverages

minimizes

Select all that apply The cost of new common stock is different from the cost of Blank______ because of the flotation costs involved. Multiple select question. debt preferred stock retained earnings common stock

retained earnings common stock

In order to raise capital, the company sells $2,000 bonds paying $200 in annual interest. What is the bond's yield? Multiple choice question. 25% 10% 5% 50%

10%

True or false: investments are judged against the specific means of financing.

False

_______ capital is allocated to purchase real capital (long-term plant and equipment).

Financial

12

If funds cost the firm 12 percent, then all projects must be tested to ensure each earns a minimum rate of return of _______ percent.

As capital needs increase the marginal cost of capital will? Multiple choice question. Decrease Remain constant Increase

Increase

What effect do flotation costs have on the marginal cost of capital? Multiple choice question. Decrease Increase No effect

Increase

When using short-term versus long-term debt, the manger needs to know how interest rates move over the Blank______ cycle. Multiple choice question. business production dividend cash

business

With respect to a firm's capital structure, a growth firm in a reasonably stable industry can afford to absorb more Blank______ than a firm in a cyclical industry. Multiple choice question. cash debt equity shareholders

debt

With respect to a firm's capital structure, a growth firm in a reasonably stable industry can afford to absorb more Blank______ than a firm in a cyclical industry. Multiple choice question. equity debt cash shareholders

debt

The cost of preferred stock is Multiple choice question. Dp/Pp -F D1/Ke - g Rf + β(Km - Rf) Y(1-T)

Dp/Pp -F

The cost of funds is referred to as the cost of _______.

capital

Retained earnings is an Blank______ source of funds. Multiple choice question. poor external uncommon internal

internal

Select all that apply An optimal capital structure will Blank______. Multiple select question. maximize the value of the firm minimize the cost of capital maximize the earnings per share maximize the value of assets

maximize the value of the firm minimize the cost of capital

The cost of preferred stock is Multiple choice question. a tax by the government a tax-deductible expense the yield to maturity not a tax-deductible expense

not a tax-deductible expense

If a firm uses its book value of debt instead of its market value of debt to calculate its WACC, then its WACC will likely be Blank______. Multiple choice question. only slightly off much higher than it should be much lower than it should be

only slightly off

The firm's minimum overall cost of capital represents its Multiple choice question. cost of debt optimal capital structure cost of equity cost of preferred stock

optimal capital structure

The minimum acceptable rate of return is Multiple choice question. the company's dividend evaluation the cost of the funds for investment 6% dependent upon the firm's capital structure

the cost of the funds for investment

The cost of debt is measured by Multiple choice question. the interest rate at which the firm can raise new capital the interest rate at which firm X can earn the interest rate paid to the firm's creditors for late making payments the interest rate at which stockholders can earn

the interest rate at which the firm can raise new capital

Real capital refers to long-term plant and _______ .

equipment

The cost of new common stock is Multiple choice question. D1/(P0 - F) + g Rf + β(Km - Rf) Dp/Pp -F Y(1-T)

D1/(P0 - F) + g

The current price of stock as per dividend valuation model is: Multiple choice question. D1/Ke + g D1(Ke + g) D1(Ke - g) D1/Ke - g

D1/Ke - g

The cost of common stock is Multiple choice question. Dp - F/Pp Dp/Pp -F Y(1-T) D1/P0 + g

D1/P0 + g

The cost of retained earnings is Multiple choice question. D1/P0 + g D1/(Ke - g) Rf + β(Km - Rf) Y(1-T)The cost of retained earnings is Multiple choice question. D1/P0 + g D1/(Ke - g) Rf + β(Km - Rf) Y(1-T)

D1/P0 + g

With respect to the WACC: Multiple choice question. It is inappropriate to use it for investments when the company is considering raising new finance It is the benchmark discount for all investments, but is adjusted for projects with different risk It is the discount rate that is used for all investments without adjustment It is the benchmark discount for all investments made by the company

It is the benchmark discount for all investments, but is adjusted for projects with different risk

Identify the first step that a company should take to determine its appropriate capital mix. Multiple choice question. It should raise capital by issuing bonds. It should determine if its current capital mix is optimal. It should raise capital by issuing shares. It should determine the cost of raising incremental capital.

It should determine if its current capital mix is optimal.

The weights that should be used to calculate the weighted average cost of capital (WACC) should be: Multiple choice question. Hypothetical weights Market-value weights Combination of market-value and book-value weights Book-value weights

Market-value weights

How does the level of debt affect the weighted average cost of capital (WACC)? Multiple choice question. The WACC initially falls and then rises as debt increases. The WACC always falls as debt increases. The WACC always increases as debt increases. The WACC initially rises and then falls as debt increases.

The WACC initially falls and then rises as debt increases.

What are flotation costs? Multiple choice question. They are the costs incurred to issue new securities in the market. They are the costs incurred to keep a project in the business. They are the costs incurred to insure the payment due to bondholders. They are the costs incurred to meet day to day expenses.

They are the costs incurred to issue new securities in the market.

Flotation costs increase the cost of new equity. True false question.

True

What does WACC stand for? Multiple choice question. Weighted average company cost Working amount of corporate cash Weighted average cost of capital Working amount of corporate cost

Weighted average cost of capital

The cost of the components in a firm's capital structure changes each time the firm varies its Multiple choice question. business cycle current debt current assets debt-assets mix

debt-assets mix

Select all that apply Retained earnings are Multiple select question. earnings belonging to bondholders for repayment of bonds earnings available to be given out in the form of a dividend earnings before taxes earnings available for reinvestment in the business

earnings available to be given out in the form of a dividend earnings available for reinvestment in the business

Multiple Choice Question The WACC rises at higher levels of debt owing to Blank______. Multiple choice question. higher working capital higher dividend costs excess free cash flow financial distress costs

financial distress costs

The weights used in WACC are based on Blank______. Multiple choice question. the book value of debt and the book value of equity the book value of debt and the market value of equity the market value of debt and the market value of equity the market value of debt and the book value of equity

the market value of debt and the market value of equity

The yield to maturity of a company's debt is set by the company. True false question.

False

Select all that apply Which of the following does capital structure impact on? Multiple select question. Operating profit Firm value Cost of capital Working capital ratios

Firm value Cost of capital

The after-tax cost of debt is Multiple choice question. Dp/Pp -F Rf + β(Km - Rf) D1/Ke - g Y(1-T)

Y(1-T)

Yield to maturity is the rate a firm has to pay on a Multiple choice question. market-tax basis before-tax basis after-tax basis between-tax basis

before-tax basis

Marginal cost of capital will Blank______ if a firm is heavily leveraged. Multiple choice question. increase decrease not change

increase

The yield to maturity is greater than the cost of debt because Multiple choice question. the debt is paid off early yield to maturity relates to short-term debt, whereas cost of debt relates to long-term debt interest is tax deductible debt cost less over time

interest is tax deductible

A firm should use equity financing when Multiple choice question. the price of common stock is low the price preferred stock is low the price of stock is high the price of stock is low

the price of stock is high

After exhausting the lending or investing power of those closest to you, and you have to look to other sources, your marginal cost of capital will probably go ______. Multiple choice question. down not change up

up

The firm's required rate of return in the capital budget decision is Multiple choice question. the interest rate of bonds weighted average cost of capital the prime rate the interest rate used by other firms in the industry

weighted average cost of capital