Finance 3150 Cost of Capital Quiz

Of the following, which is NOT a source of funds for a company? All are sources of funds for companies. Common shareholders Commercial banks Preferred stockholders

All are sources of funds for companies.

The weighted average cost of capital is ________. the cost of capital for the firm as a whole made up of three financing components: the cost of debt, the cost of preferred stock, and the cost of equity the average of the cost of each financing component, weighted by the proportion of each component All of the above

All of the above

The cost of debt could be which of the following? All of the choices above could be considered the cost of debt. The required return on money borrowed as a long-term loan from a bank The required return on money borrowed from a venture capitalist The yield-to-maturity on money raised by selling bonds

All of the choices above could be considered the cost of debt.

________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings. Cost of capital NPV Working capital management Capital structure

Capital structure

Which of the items below is sometimes termed hybrid equity financing? Callable bonds Variable rate bonds Preferred stock Retained earnings

Preferred stock

Farmer's Supply is considering opening a clothing store, which would be a new line of business for the firm. Management has decided to use the cost of capital of a similar clothing store as the discount rate to evaluate this proposed expansion. Which one of the following terms describes this evaluation approach? Aftertax approach Pure play approach Market play Equity approach Subjective approach

Pure play approach

Ted is trying to decide what cost of capital he should assign to a project. Which one of the following should be his primary consideration in this decision? Mix of funds used to finance the project Length of the project's life Use, or lack, of preferred stock as a financing option Risk level of the project Amount of debt used to finance the project

Risk level of the project

Which of the following would be classified as debt lenders for a firm? Suppliers, nonbank lenders, and commercial banks Nonbank lenders, common shareholders, and commercial banks Preferred shareholders, banks, and nonbank lenders Preferred shareholders, common shareholders, and suppliers

Suppliers, nonbank lenders, and commercial banks

When calculating the after-tax weighted average cost of capital (WACC), which of the following costs are adjusted for taxes in the equation? The before-tax cost of equity The after-tax cost of debt The before-tax cost of debt The before-tax cost of preferred stock

The before-tax cost of debt

A firm's capital structure can be determined by examining which parts of the firm's balance sheet? The short-term assets and liabilities The debt and equity The long-term assets None of the above because a firm's capital structure is best observed on the income statement.

The debt and equity

Black Stone Furnaces wants to build a new facility. The cost of capital for this investment is primarily dependent on which one of the following? Current tax rate The firm's overall source of funds Firm's historical average rate of return Source of the funds used to build the facility The nature of the investment

The nature of the investment

Which one of the following represents the minimum rate of return a firm must earn on its assets if it is to maintain the current value of its securities? Weighted average cost of capital Weighted average cost of preferred and common stock Aftertax cost of debt Pretax cost of debt Cost of equity

Weighted average cost of capital

Which one of the following is used as the pretax cost of debt? Annual interest divided by the market price per bond for the latest bond issue Coupon rate on the firm's latest bond issue Average current yield on the firm's outstanding debt Weighted average yield to maturity on the firm's outstanding debt Average coupon rate on the firm's outstanding bonds

Weighted average yield to maturity on the firm's outstanding debt

The ________ is the cost of each financing component multiplied by that component's percent of the total funding amount. cost of capital IRR cost of debt NPV

cost of capital

Lester lent money to The Corner Store by purchasing bonds issued by the store. The rate of return that he and the other lenders require is referred to as the: cost of equity pure play cost subjective cost cost of debt weighted average cost of capital

cost of debt

When a company borrows money from a bank or sells bonds, it is called ________. equity financing debt financing capital structure financing stock financing

debt financing

The cost of retained earnings ________. is all of the above is the cost of issuing new common stock without the flotation costs is the appropriate cost of capital for the shareholders is the loss of the dividend option for the owners

is all of the above

Investors ________ for estimating the WACC. prefer market value to book value prefer book value to market value are indifferent between using market and book value prefer a mix of book and market value

prefer market value to book value

Market values require multiplying the ________ of each component source of capital times the ________. price, book value None of the above price, quantity book value, quantity

price, quantity

The cost of capital is ________. All of the above the cost of each financing component multiplied by that component's percent of the total borrowed. the cost of debt in a firm that finances with both debt and equity. another name for the IRR.

the cost of each financing component multiplied by that component's percent of the total borrowed.