PROBLEM SET (CH.12) Name: __________________________ Date: _____________ 1. A) B) C) D) !

) The return that shareholders require on their investment in the firm is called the: Dividend yield. Cost of equity. Capital ains yield. Cost of capital. "ncome return.

#. To estimate the cost of equity for a firm$ %hich of the follo%in varia&les %ould N'T &e needed( A) The current dividend payment. B) The ris)*free interest rate. C) The de&t+equity ratio. D) The &eta coefficient. !) The mar)et price of the stoc). ,. The %ei hted avera e of the firm-s costs of equity$ preferred stoc)$ and afterta. de&t is the: A) /e%ard to ris) ratio for the firm. B) !.pected capital ains yield for the stoc). C) !.pected capital ains yield for the firm. D) 0ortfolio &eta for the firm. !) 1ei hted avera e cost of capital 21ACC). 3. A) B) C) D) !) 4. A) B) C) D) !) All else the same$ a hi her corporate ta. rate _____________________. %ill decrease the 1ACC of a firm %ith some de&t in its capital structure %ill increase the 1ACC of a firm %ith some de&t in its capital structure %ill not affect the 1ACC of a firm %ith some de&t in its capital structure %ill decrease the 1ACC of a firm %ith no de&t in its capital structure %ill chan e the 1ACC of a firm %ith some de&t in its capital structure$ &ut the direction is unclear. The 2preta.) cost of de&t for a firm _____________________________. is al%ays reater than the cost of equity normally cannot &e o&served$ directly or indirectly$ in the mar)etplace is equal to the yield to maturity on the firm-s outstandin &onds is reater than the avera e coupon rate on the firm-s outstandin &onds is equal to the avera e coupon rate on the firm-s outstandin &onds

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5. The lon *term de&t of your firm is currently sellin for 1678 of its face value. The issue matures in 1# years and pays an annual coupon of 9.48. 1hat is the cost of de&t( A) 4.568 B) 5.368 C) 9.468 D) :.768 !) 7.,68 9. A company has preferred stoc) outstandin %hich pays a dividend of ;5 per share a year. The current stoc) price is ;94 per share. 1hat is the cost of preferred stoc)( A) 58 B) 98 C) 168 D) 78 !) :8 :. Treasury &ills currently have a return of #.48 and the mar)et ris) premium is 98. "f a firm has a &eta of 1.3$ %hat is its cost of equity( A) :.18 B) 7.78 C) 16.:8 D) 1#.,8 !) 13.38 7. <uppose that your firm has a cost of equity of 1:8 and a cost of de&t of :8. "f the tar et de&t+equity ratio is 6.56$ and the ta. rate is ,48$ %hat is the firm-s %ei hted avera e cost of capital 21ACC)( A) 9.38 B) 7.78 C) 11.:8 D) 1,.#8 !) 13.,8 16. A) B) C) D) !) =or purposes of findin the 1ACC$ %hich of the follo%in is correct( >?D@! >?AABA! D+> A !+> ? 1.66 D+> A !+> ? > >+! ? D21*t)

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11. Civen the follo%in information$ %hat is the firm-s %ei hted avera e cost of capital( Dar)et value of equity ? ;,6 millionE mar)et value of de&t ? ;#6 millionE cost of equity ? 148E cost of de&t ? 78E equity &eta ? 1.3E ta. rate ? ,48. A) 11.,38 B) 1#.568 C) 1#.798 D) 1,.,#8 !) 13.6:8 1#. The 1ACC: A) Depends on the source of the funds used for a particular proFect. B) "s equal to the cost of de&t or equity$ dependin on %hich type of financin the firm uses the most. C) "s also )no%n as the internal rate of return 2"//). D) "s the return required on a proFect to compensate investors for the use of their funds. !) 1ill &e the same for a firm-s different divisions if they have different de rees of ris). 1,. The mar)et value of de&t is ;3#4 million and the total mar)et value of the firm is ;7#4 million. The cost of equity is 198$ the cost of de&t is 168$ and the ta. rate is ,48. 1hat is the 1ACC( A) 11.618 B) 1#.1:8 C) 1,.9:8 D) 13.198 !) 14.538 13. The opportunity cost associated %ith the firm-s capital investment in a proFect is called its: A) Cost of capital. B) Beta coefficient. C) Capital ains yield. D) <un) cost. !) "nternal rate of return. 14. A) B) C) D) 1hich of the follo%in is true re ardin the 1ACC( The 1ACC is equal to the firm-s em&edded de&t cost times 21 * the ta. rate). The 1ACC requires the cost of de&t &e increased &y 21 * the ta. rate). The 1ACC is directly o&serva&le in financial mar)ets. The 1ACC is the required return on any investments a firm ma)es that have a level of ris) equal to that of present operations. !) The 1ACC reflects the ris) and tar et capital structure of the mar)et as a %hole.

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15. A &ond issue sells for ;:94. The coupon rate is 98$ the &onds mature in #6 years$ and interest is paid annually. The ta. rate is ,48. 1hat is the afterta. cost of de&t( A) ,.1:8 B) 3.448 C) :.#78 D) 7.,38 !) 4.,78 19. The interest rate that should &e used %hen evaluatin a capital investment proFect is sometimes called the ____________________. ". internal rate of return "". ris)*free rate """. cost of capital " only "" only """ only "" and """ only "$ "" and """

A) B) C) D) !)

1:. A firm is e.pected to pay a dividend of ;,.46 per share in one year. This dividend$ alon %ith the firm-s earnin s$ is e.pected to ro% at a rate of 98 forever. "f the current mar)et price for a share is ;59$ %hat is the cost of equity( A) 9.668 B) 1#.##8 C) 14.538 D) 13.668 !) 1,.358 17. A) B) C) D) !) The appropriate cost of capital for a proFect depends on ______________________. the type of security issued to finance the proFect the type of assets used in the proFect 2that is$ %hether they are current or fi.ed assets) the ris) associated %ith the proFect the total ris) of the firm-s equity the interest rate on the firm-s outstandin lon *term &onds

#6. The appropriate discount rate to &e used %hen analyGin an investment proFect is _________________. A) the rate of return that %ill result in the hi hest N0> B) the rate of return financial mar)ets offer on investments of similar ris) C) the internal rate of return on that investment D) equal to the cost of capital &ased on the firm-s historical assets !) the rate of interest the firm %ould pay if it sold &onds

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#1. A) B) C) D) !)

The return that lenders require on their loaned funds to the firm is called the: Coupon rate. Current yield. Cost of de&t. Capital ains yield. Cost of capital.

##. 1hat is the 1ACC for a firm %ith 368 de&t$ #68 preferred stoc) and 368 equity if the respective costs for these components are 58 after*ta.$ 1#8 after*ta.$ and 1:8 &efore* ta.( The firm-s ta. rate is ,48. A) 7.3:8 B) 11.158 C) 1#.668 D) 14.568 #,. 1hat is the 1ACC for a firm %ith 368 de&t$ #68 preferred stoc) and 368 equity if the respective costs for these components are 7.#,8 &efore*ta.$ 1#8 after*ta.$ and 1:8 &efore*ta.( The firm-s ta. rate is ,48. A) 7.3:8 B) 11.158 C) 1#.668 D) 14.568 #3. Calculate a firm-s 1ACC iven that the total value of the firm is ;#$666$666$ ;566$666 of %hich is de&t$ the cost of de&t and equity is 168 and 148 respectively$ and the firm pays no ta.es: A) 7.68 B) 11.48 C) 1,.48 D) 13.38 #4. The company cost of capital$ after ta.$ for a firm %ith a 56+36 de&t+equity split$ :8 cost of de&t$ 148 cost of equity$ and a ,48 ta. rate %ould &e: A) 7.1#8 B) 16.:68 C) 1,.:68 D) 9.6#8

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#5. 1hat is the 1ACC for a firm %ith 368 de&t$ #68 preferred stoc) and 368 equity if the respective costs for these components are 58 after*ta.$ 1#8 after*ta.$ and 1:8 &efore* ta.( The firm-s ta. rate is ,48. A) 1#.668 B) 14.568 C) 11.158 D) 7.3:8 #9. Calculate a firm-s 1ACC iven that the total value of the firm is ;#$466$666$ ;466$666 of %hich is de&t$ the cost of de&t and equity is 148 and #68 respectively$ and the firm pays no ta.es: A) 11.48 B) 1,.48 C) 13.38 D) 17.68 #:. 1hat is the company cost of capital for a firm financed %ith ,68 de&t if the de&t requires a 168 return and equity requires a 158 return( A) 1,.,8 B) 13.#8 C) 13.:8 D) 11.:8 #7. 1hat is the 1ACC for a firm %ith 468 de&t and 468 equity that pays 1#8 on its de&t$ #68 on its equity$ and has a 368 ta. rate( A) 1#.68 B) 15.68 C) 7.58 D) 1,.58 ,6. 1hat is a firm-s %ei hted*avera e cost of capital if the stoc) has a &eta of 1.34$ Treasury &ills yield 48$ and the mar)et portfolio offers an e.pected return of 138( "n addition to equity$ the firm finances ,68 of its assets %ith de&t that has a yield to maturity of 78. The firm is in the ,48 mar inal ta. &rac)et.

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Answer Key

1. #. ,. 3. 4. 5. 9. :. 7. 16. 11. 1#. 1,. 13. 14. 15. 19. 1:. 17. #6. #1.

B C ! A C B ! D D C A D B A D ! C B C B C

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