Question 1 of 205.0 PointsFinancial capital does NOT include: A. stock. B. bonds. C. preferred stock

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Question 1 of 205.0 PointsFinancial capital does NOT include: A. stock. B. bonds. C. preferred stock. D. working capital.Question 2 of 205.0 PointsDebreu 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%. Its pretax cost of preferred equity is 7%, and its 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 3 of 205.0 PointsIf 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 4 of 205.0 PointsThe coupon rate on a debt issue is 12%. If the yield to maturity on the debt is 9.33%, what is the after-tax cost of debt in the weighted average cost of capital if the firm’s tax rate is 34%? A. 3.17% B. 4.08% C. 6.16% D. 7.92%Question 5 of 205.0 PointsThe coupon rate on an issue of debt is 12%. The yield to maturity on this issue is 14%. The corporate tax rate is 31%. What would be the approximate after-tax cost of debt for a new issue of bonds? A. 4.34% B. 3.72% C. 9.66% D. 8.28%Question 6 of 205.0 PointsKlein Corp. can issue $1,000 par value bond that pays $100 per year in interest at a price of $980. The bond will have a 5-year life. The firm is in a 35% tax bracket. What is the after-tax cost of debt? A. 9.14% B. 9.03% C. 5.87% D. 6.8%Question 7 of 205.0 PointsLewis, Schultz and Nobel Development Corp. has an after-tax cost of debt of 6.3 percent. With a tax rate of 30 percent, what is the yield on the debt? A. 4.41% B. 9.0% C. 1.89% D. 21%Question 8 of 205.0 PointsA firm is paying an annual dividend of $3.63 for its preferred stock which is selling for $62.70. There is a selling cost of $3.30. What is the after-tax cost of preferred stock if the firm’s tax rate is 33%? A. 2.02% B. 4.09% C. 5.79% D. 6.11%Question 9 of 205.0 PointsThe 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 10 of 205.0 PointsIf 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 11 of 205.0 PointsIf flotation costs go down, the cost of new preferred stock will: A. go up. B. go down. C. stay the same. D. slowly increase.Question 12 of 205.0 PointsA firm’s preferred stock pays an annual dividend of $4, and the stock sells for $80. Flotation costs for new issuances of preferred stock are 5% of the stock value. What is the after-tax cost of preferred stock if the firm’s tax rate is 30%? A. 1.2% B. 1.58% C. 3.68% D. 5.26%Question 13 of 205.0 PointsNew common stock is more expensive than Ke to: A. compensate for risk. B. compensate for more dividends. C. compensate for expansionary problems. D. cover distribution costs.Question 14 of 205.0 PointsIn determining the cost of retained earnings: A. the dividend valuation model is inappropriate. B. flotation costs are included. C. growth is not considered. D. the capital asset pricing model can be used.Question 15 of 205.0 PointsExpected cash dividends are $2.50, the dividend yield is 6%, flotation costs are 4% of price, and the growth rate is 3%. Compute cost of new common stock. A. 9.00% B. 9.25% C. 9.18% D. 9.44%Question 16 of 205.0 PointsFor many firms, the cheapest and most important source of equity capital is in the form of: A. debt. B. common stock. C. preferred stock. D. retained earnings.Question 17 of 205.0 PointsThe optimal capital structure for firms in cyclical industries should contain __________ debt than firms in stable industries. A. more B. less C. an equal amount of D. None of the above. There is no relationship between the cyclical nature of an industry and optimal capital structure.Question 18 of 205.0 PointsThe component parts of the cost of capital should be weighted by their proportion in the firm’s __________ capital structure. A. current B. historical C. optimum D. expectedQuestion 19 of 205.0 PointsA firm in a stable industry should use: A. a large amount of debt to lower the cost of capital. B. no debt at all. C. preferred stock in place of debt. D. a limited amount of debt to lower the cost of capital.Question 20 of 205.0 PointsThe general rule for using the weighted average cost of capital (WACC) in capital budgeting decisions is to accept all projects with: A. rates of return greater than or equal to the WACC. B. rates of return less than the WACC. C. rates of return equal to or less than the WACC. D. positive rates of return.

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