If a company's weighted average cost of capital is less
Subject: Business    / Finance    

Question

If a company's weighted average cost of capital is less than the required return on equity, then the firm

    

is financed with more than 50% debt.

    

is perceived to be safe.

    

has debt in its capital structure.

    

must have preferred stock in its capital structure.

Firms have no way to directly estimate the discount rate that reflects the risk of

    

a publicly traded security.

    

its debt securities.

    

the incremental cash flows from a particular project.

    

none of the above.

A firm's overall cost of capital is

    

less than its cost of debt.

    

a weighted average of the costs of capital for the collection of individual projects that the firm is working on.

    

best measured by the cost of capital of the riskiest projects that the firm is working on.

    

none of the above.

The finance balance sheet is

    

the same as the accounting balance sheet, but it is based on market values.

    

the same as the accounting balance sheet, but it does not have to balance.

    

based on cash rather than accrual accounting.

    

the same as the accounting balance sheet, but it is based on historical values.

The value of the cash flows that the assets of a firm are expected to generate must equal

    

the value of the cash flows claimed by both the equity and debt investors.

    

the value of the cash flows claimed by the equity investors.

    

the value of the cash flows claimed by the debt investors.

    

the revenue produced by the firm.

The beta for a firm can be estimated by

    

adding up the betas of the individual projects of the firm.

    

taking the weighted average of the beta for the individual projects of the firm.

    

taking the simple average of the beta for the individual projects of the firm.

    

none of the above.

When estimating the cost of debt capital for a firm, we are primarily interested in

    

the weighted average cost of capital.

    

the cost of long-term debt.

    

the coupon rate of the debt.

    

none of the above.

A bond has a coupon rate of 6 percent and the bond makes semiannual coupon payments. The dollar amount of coupon interest received every six months is

    

$30.

    

$60 plus or minus the prorate portion of the discount or premium that the bond was purchased for.

    

$60.

    

$30 plus or minus the prorate portion of the discount or premium that the bond was purchased for.

Bond issuance costs include

    

investment banking fees.

    

legal fees.

    

accountant fees.

    

all of the above.

Income taxes have the effect of

    

A. increasing the cost of debt for a firm.

    

B. decreasing the cost of debt for a firm.

    

C. decreasing the cost of equity for a firm.

    

D. Both B and C are correct.

Jacque Ewing Drilling, Inc. has a beta of 1.3 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 8 percent and the expected return on the market is 12 percent, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 40 percent?

    

13.20%

    

15.57%

    

7.92%

    

23.60%

Radical VenOil, Inc. has a cost of equity capital equal to 22.8 percent. If the risk-free rate of return is 10 percent and the expected return on the market is 18 percent, then what is the firm's beta if the marginal tax rate is 35 percent?

    

1.28

    

4.10

    

1.0

    

1.60

Turquoise Electronics, Inc. paid a dividend of $1.87 last year. If the firm's growth in dividends is expected to be 10 percent next year and then zero thereafter, then what is its cost of equity capital if the price of its common shares is currently $25.71?

    

The problem is not solvable with the information that is given.

    

18.00%

    

7.27%

    

8.00%

Wally's War Duds has a preferred share issue outstanding with a current price of $26.57. The firm is expected to pay a dividend of $1.86 per share a year from today. What is the firm's cost of preferred equity? Round your final answer to nearest percentage.

    

8.00%

    

7.50%

    

7.00%

    

6.50%

Melba's Toast has a preferred share issue outstanding with a current price of $19.50. The firm is expected to pay a dividend of $2.34 per share a year from today. What is the firm's cost of preferred equity?

    

12.00%

    

11.50%

    

12.25%

    

11.75%

In order to use a firm’s WACC to evaluate its future project's flows, which of the following must hold?

    

A. The project will be financed with the same proportion of debt and equity as the firm.

    

B. The systematic risk of the project is the same as the overall systematic risk of the firm.

    

C. The project should have conventional cash flows.

    

D. Both A and B choices are correct.

If the market risk premium is currently 6 percent and the risk-free rate of return is 4 percent, then what is the expected return on a common share with a beta equal to 2?

    

8.0%

    

12.0%

    

16.0%

    

10.0%

You are analyzing the cost of capital for a firm that is financed with 65 percent equity and 35 percent debt. The cost of debt capital is 8 percent, while the cost of equity capital is 20 percent for the firm. What is the overall cost of capital for the firm?

    

15.8%

    

20.0%

    

12.2%

    

14.0%

You are analyzing the cost of capital for a firm that is financed with $300 million of equity and $200 million of debt. The cost of debt capital for the firm is 9 percent, while the cost of equity capital is 19 percent. What is the overall cost of capital for the firm? Assume there are no taxes.

    

14.0%

    

13.0%

    

15.0%

    

16.0%

Ronnie's Comics has found that its cost of common equity capital is 15 percent and its cost of debt capital is 12 percent. The firm is financed with $250,000,000 of common shares (market value) and $750,000,000 of debt. What is the after-tax weighted average cost of capital for Ronnie's, if it is subject to a 35 percent marginal tax rate?

    

9.6%

    

8.75%

    

6.05%

    

13.65%