A+ Answers of the following Questions

Question 1

A 10-year bond pays 8% on a face value of $1,000. If similar bonds are currently yielding 10%, what is the market value of the bond? Use annual analysis.

A. Less than $900

B. More than $900 and less than $1100

C. More than $1100

D. not enough information to tell

Question 2

A higher interest rate (discount rate) would:

A. reduce the price of corporate bonds.

B. reduce the price of preferred stock.

C. reduce the price of common stock.

D. all of the above

Question 3

The risk premium is likely to be highest for:

A. U.S. government bonds.

B. corporate bonds.

C. gold mining expedition.

D. Either b or c

Question 1
Financial capital does not include:
A. stock.
B. bonds.
C. preferred stock.
D. working capital.

Question 2
The overall weighted average cost of capital is used instead of costs for specific sources of funds because:
A. use of the cost for specific sources of capital would make investment decisions inconsistent.
B. a project with the highest return would always be accepted under the specific cost criteria.
C. investments funded by low cost debt would have an advantage over other investments.
D. Both A and C

Question 3
Debreu Beverages has an optimal capital structure that is 50% common equity, 40% debt, and 10% preferred stock. Debreu's pretax cost of equity is 12%. It's pretax cost of preferred equity is 7%, and it's pretax cost of debt is also 7%. If the corporate tax rate is 35%, what is the weighed average cost of capital?
A. Between 7% and 8%
B. Between 8% and 9%
C. Between 9% and 10%
D. Between 10% and 12%

Question 1
For a firm paying 7% for new debt, the higher the firm's tax rate:
A. the higher the after-tax cost of debt.
B. the lower the after-tax cost of debt.
C. after-tax cost is unchanged.
D. Not enough information to judge.

Question 2
If a firm's bonds are currently yielding 8% in the marketplace, why would the firm's cost of debt be lower?
A. Interest rates have changed.
B. Additional debt can be issued more cheaply than the original debt.
C. There should be no difference; cost of debt is the same as the bond's market yield.
D. Interest is tax-deductible.

Question 3
A firm's cost of financing, in an overall sense, is equal to its:
A. weighted average cost of capital.
B. required yield that investors seek for various kinds of securities.
C. required rate of return that investors seek for various kinds of securities.
D. All of the above
Question 1
A firm has $25 million in assets and its optimal capital structure is 60% equity. If the firm has $18 million in retained earnings, at what asset level will the firm need to issue additional stock? (Assume no growth in retained earnings.)
A. The firm should have already issued additional stock.
B. The firm can increase assets to $30 million.
C. The firm can increase assets to $41.67 million.
D. There is insufficient information to determine an answer.

Question 2
The pre-tax cost of debt for a new issue of debt is determined by:
A. the investor's required rate of return on issued stock.
B. the coupon rate of existing debt.
C. the yield to maturity of outstanding bonds.
D. All of the above

Question 3
The cost of equity capital in the form of new common stock will be higher than the cost of retained earnings because of:
A. the existence of taxes.
B. the existence of flotation costs.
C. investors' unwillingness to purchase additional shares of common stock.
D. the existence of financial leverage.

Question 1
If the flotation cost goes up, the cost of retained earnings will:
A. go up.
B. go down.
C. stay the same.
D. slowly increase.

Question 2
A firm has $25 million in assets and its optimal capital structure is 60% equity. If the firm has $18 million in retained earnings, at what asset level will the firm need to issue additional stock? (Assume no growth in retained earnings.)
A. The firm should have already issued additional stock.
B. The firm can increase assets to $30 million.
C. The firm can increase assets to $41.67 million.
D. There is insufficient information to determine an answer.

Question 3
The overall weighted average cost of capital is used instead of costs for specific sources of funds because:
A. use of the cost for specific sources of capital would make investment decisions inconsistent.
B. a project with the highest return would always be accepted under the specific cost criteria.
C. investments funded by low cost debt would have an advantage over other investments.
D. Both A and C