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This document contains 40 multiple choice questions and answers related to calculating costs of capital, including: 1) The cost of preferred stock for a company with a $18 market price per share that pays a 4% annual dividend based on a $100 par value and has $1.50 per share flotation costs, with a 40% tax rate. 2) The cost of retained earnings and new common stock for a company paying a dividend of $3.50 per share expected to grow 10% annually, with a stock price of $40 and $4 flotation costs, and 35% tax rate. 3) Questions relate to using the capital asset pricing model to calculate costs of capital for companies

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147 views3 pages

Upload 9

This document contains 40 multiple choice questions and answers related to calculating costs of capital, including: 1) The cost of preferred stock for a company with a $18 market price per share that pays a 4% annual dividend based on a $100 par value and has $1.50 per share flotation costs, with a 40% tax rate. 2) The cost of retained earnings and new common stock for a company paying a dividend of $3.50 per share expected to grow 10% annually, with a stock price of $40 and $4 flotation costs, and 35% tax rate. 3) Questions relate to using the capital asset pricing model to calculate costs of capital for companies

Uploaded by

Meghna Cm
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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31) A company has preferred stock with a current market price of $18 per share.

The preferred stock pays


an annual dividend of 4% based on a par value of $100. Flotation costs associated with the sale of
preferred stock equal $1.50 per share. The company's marginal tax rate is 40%. Therefore, the cost of
preferred stock is
A) 28.80%.
B) 24.24%.
C) 22.22%.
D) 14.55%.
Answer: B
Diff: 2 Page Ref: 300
Keywords: Cost of Preferred Stock, Net Proceeds, Flotation Costs

32) Johnson Production Company paid a dividend yesterday of $3.50 per share. The dividend is expected
to grow at a constant rate of 10% per year. The price of KayCee's common stock today is $40 per share. If
KayCee decides to issue new common stock, flotation costs will equal $4.00 per share. KayCee's
marginal tax rate is 35%. Based on the above information, the cost of retained earnings is
A) 26.41%.
B) 20.09%.
C) 19.63%.
D) 17.55%.
Answer: C
Diff: 2 Page Ref: 302

33) Johnson Production Company paid a dividend yesterday of $3.50 per share. The dividend is expected
to grow at a constant rate of 10% per year. The price of KayCee's common stock today is $40 per share. If
KayCee decides to issue new common stock, flotation costs will equal $4.00 per share. KayCee's
marginal tax rate is 35%. Based on the above information, the cost of new common stock is
A) 26.41%.
B) 20.09%.
C) 19.63%.
D) 17.55%.
Answer: B
Diff: 2 Page Ref: 302
Keywords: Cost of New Common Stock, Flotation Costs

34) The risk-free rate of return is 3% and the expected return on the market portfolio is 14%. Oklahoma
Oilco has a beta of 2.0 and a standard deviation of returns of 26%. Oilco's marginal tax rate is 35%.
Analysts expect Oilco's net income to grow by 12% per year for the next 5 years. Using the capital asset
pricing model, what is Oklahoma Oilco's cost of retained earnings?
A) 18.6%
B) 21.2%
C) 22.8%
D) 25.0%
Answer: D

35) Jiffy Co. expects to pay a dividend of $3.00 per share in one year. The current price of Jiffy common
stock is $60 per share. Flotation costs are $3.00 per share when Jiffy issues new stock. What is the cost of
internal common equity (retained earnings) if the long-term growth in dividends is projected to be 8
percent indefinitely?
A) 13 percent
B) 14 percent
C) 15 percent
D) 16 percent
Answer: A

36) JPR Company is financed 75 percent by equity and 25 percent by debt. If the firm expects to earn $30
million in net income next year and retain 40% of it, how large can the capital budget be before common
stock must be sold?
A) $7.5 million
B) $12.0 million
C) $15.5 million
D) $16.0 million
Answer: C

37) The cost of new preferred stock is equal to


A) the preferred stock dividend divided by the market price.
B) the preferred stock dividend divided by its par value.
C) (1 - tax rate) times the preferred stock dividend divided by net price.
D) preferred stock dividend divided by the net selling price of preferred.
Answer: D
Diff: 2 Page Ref: 300
Keywords: Cost of New Preferred Stock

38) In general, the least expensive source of capital is


A) debt.
B) new common stock.
C) preferred stock
D) retained earnings.
Answer: A
Diff: 2 Page Ref: 297
Keywords: Cost of Capital, Sources of Capital

39) The cost of external equity capital is greater than the cost of retained earnings because of
A) flotation costs on new equity.
B) increasing marginal tax rates.
C) higher dividends.
D) greater risk for shareholders.
Answer: A
Diff: 2 Page Ref: 302
Keywords: Flotation Costs, Cost of New Common Stock, Cost of Retained Earnings

40) Phillips Enterprises Inc. is expected to pay a dividend of $2.60 next year. Dividends are expected to
grow at a constant rate of 8% per year, and the stock price is currently $20.00. New stock can be sold at
this price subject to flotation costs of 15%. The company's marginal tax rate is 35%. Compute the cost of
internal equity (retained earnings) and the cost of external equity (new common stock), respectively.
A) 0, 21.00%
B) 8.00%, 23.29%
C) 21.00%, 23.29%
D) 23.00%, 25.48%
Answer: C
Diff: 2 Page Ref: 302

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