CH14 FIN TEST

To determine a firm's cost of capital, one must include:

= the returns currently required by both debtholders and stockholders.

Patel & Howell has zero coupon bonds outstanding that mature in 4 years. The bonds have a face value of $1,000 and a current market price of $798. What is the pretax cost of debt? (Use semiannual compounding.)

= 5.72%

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firm's cost of equity?

= A decrease in the firm's beta

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $3.36 per share and has a beta of 1.38, all else constant, which of the following actions will increase the firm's cost of equity?

= A decrease in the risk-free rate

Which of the following statements is accurate regarding the dividend growth model?

= It is only as reliable as the estimated rate of growth.

Which of the following is the main advantage of using the dividend growth model to estimate a firm's cost of equity?

= The simplicity of the model.

Assume a firm has a debt-equity ratio of .48. The firm's cost of equity is:

= directly related to the risk level of the firm.

Assume a firm has a debt-equity ratio of .36. The firm's cost of equity:

= is affected by both a change in the firm's beta and the firm's projected rate of growth.

Assume Barnes' Boots has a debt-equity ratio of .52. The firm uses the capital asset pricing model to determine its cost of equity. Accordingly, the firm's estimated cost of equity:

= is dependent upon a reliable estimate of the market risk premium.

When determining a firm's cost of capital, the most important determinant is the:

= use of the funds raised

Grill Works has 6 percent preferred stock outstanding that is currently selling for $49 per share. The market rate of return is 14 percent and the tax rate is 21 percent. What is the cost of preferred stock if its stated value is $100 per share?

= 12.24%

Lichtenfeld has a bond issue outstanding that matures in 19 years. The bonds pay interest semiannually. The bonds have a face value of $1,000 and are currently priced at $995.28. The bonds carry a coupon rate of 3.5 percent. What is the aftertax cost of debt if the total tax rate is 22 percent?

= 2.76%

Simple Foods has a zero coupon bond issue outstanding that matures in 14 years. The bonds are selling at 56 percent of par value. What is the company's aftertax cost of debt if the combined tax rate is 23 percent? (Use semiannual compounding.)

= 3.22%

The outstanding bonds of Harden Fitness are priced at $1,014.66 and mature in 5 years. These bonds have a face value of $1,000, a coupon rate of 4.5 percent, and pay interest semiannually. The tax rate is 21 percent. What is the aftertax cost of debt?

= 3.30%

When evaluating any capital project proposal, the cost of capital:

depends upon how the funds raised for that project are going to be spent.

Gould Design has $1,000 face value bonds outstanding with 17 years to maturity, a coupon rate of 5 percent, semiannual interest payments, and a current price of $987.78. What is the aftertax cost of debt if the tax rate is 21 percent?

= 4.04%

Decline, Incorporated, is trying to determine its cost of debt. The firm has a debt issue outstanding with 13 years to maturity that is quoted at 105.2 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually. What is the aftertax cost of debt if the tax rate is 21 percent?

= 4.30%

Espy Hotels has bonds outstanding that mature in 9 years, pay interest semiannually, and have a coupon rate of 5.5 percent. These bonds have a face value of $1,000 and a current market price of $989.28. What is the company's aftertax cost of debt if its tax rate is 22 percent?

= 4.41%

Jiminy's Cricket Farm issued a 20-year, 7 percent, semiannual bond four years ago. The bond currently sells for 108 percent of its face value. What is the aftertax cost of debt if the company's combined tax rate is 23 percent?

= 4.78%

Ahmad Couture has bonds outstanding with a face value of $1,000, 11 years to maturity, and a coupon rate of 6 percent paid semiannually. What is the company's pretax cost of debt if the bonds currently sell for $1,067.12?

= 5.19%