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FIN 701 W5 Exam Questions with Verified Answers
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A company's current cost of capital is based on: - Answer-both the returns currently required by its debt holders and stockholders All else constant, which one of the following will increase a company's cost of equity if the company computes that cost using the security market line approach? Ass...

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  • August 23, 2024
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  • a companys current cost of capital is based on

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FIN 701 W5 Exam Questions with
Verified Answers
A company's current cost of capital is based on: - Answer-both the returns currently
required by its debt holders and stockholders

All else constant, which one of the following will increase a company's cost of equity if
the company computes that cost using the security market line approach? Assume the
firm currently pays an annual dividend of $1 a share and has a beta of 1.2. - Answer-a
reduction in the risk-free rate

Assume Russo's has a debt- equity ratio of .4 and uses the capital asset pricing model
(CAPM) to determine its cost of equity. As a result, the company's cost of equity: -
Answer-is dependent upon a reliable estimate of the market risk premium

A group of individuals got together and purchased all of the outstanding shares of
common stock of DL Smith Inc. What is the return that these individuals require on this
investment called: - Answer-cost of equity

Textile Mills borrows money at a rate of 8.7 percent. This interest rate is referred to as
the: - Answer-cost of debt

Which one of these will increase a company's aftertax cost of debt: - Answer-a decrease
in the company's tax rate

The cost of preferred stock is computed the same as the: - Answer-rate of return on a
perpetuity

A company's weighted average cost of capital: - Answer-is the return investors require
on the total assets of the firm

The average of a company's cost of equity, cost of preferred, and aftertax cost of debt
that is weighted based on the company's capital structure is called the: - Answer-
weighted average cost of capital

If a company uses its WACC as the discount rate for all of the projects it undertakes
then the company will tend to: - Answer-increase the average risk level of the company
over time

The subjective approach to project analysis: - Answer-assigns discount rates to projects
based on the discretion of the senior managers of a firm

, When a manager develops a cost of capital for a specific project based on the cost of
capital for another firm that has a similar line of business as the project, the manager is
utilizing the ____ approach - Answer-pure play

Chelsea Fashions is expected to pay an annual dividend of $1.26 a share next year.
The market price of the stock is $24.09 and the growth rate is 2.6 percent. What is the
cost of equity: - Answer-7.83 percent

Sweet Treats common stock is currently priced at $36.72 a share. The company just
paid $2.18 per share as its annual dividend. The dividends have been increasing by 2.2
percent annually and are expected to continue doing the same. What is the cost of
equity: - Answer-8.27 percent

Highway Express has paid annual dividends of $1.32, $1.33, $1.38, $1.40, and $1.42
over the past five years, respectively. What is the average dividend growth rate: -
Answer-1.85 percent

Southern Bakeries just paid its annual dividend of $.48 a share. The stock has a market
price of $17.23 and a beta of .93. The return on the U.S. Treasury bill is 3.1 percent and
the market risk premium is 7.6 percent. What is the cost of equity: - Answer-10.17
percent

Street Corporation's common stock has a beta of 1.33. The risk-free is 3.4 percent and
the expected return on the market is 10.97 percent. What is the cost of equity: - Answer-
13.47 percent

Stock in Country Road Industries has a beta of 1.62. The market risk premium is 8.2
percent while T-bills are currently yielding 2.9 percent. Country Road's last paid annual
dividend was $1.87 per share and dividends are expected to grow at an annual rate of
3.8 percent indefinitely. The stock sells for $25 a share. What is the estimated cost of
equity using the average return of the CAPM and the dividend discount model: -
Answer-13.87 percent

National Home Rentals has a beta of 1.06, a stock price of $17, and recently paid an
annual dividend of $.92 a share. The dividend growth rate is 2.2 percent. The market
has a rate of return of 11.2 percent and a risk premium of 7.3 percent. What is the
estimated cost of equity using the average return of the CAPM and the dividend
discount model: - Answer-9.68 percent

Tidewater Fishing has a current beta of 1.16. The market risk premium is 6.8 percent
and the risk-free rate of return is 2.9 percent. By how much will the cost of equity
increase if the company expands its operations such that company beta rises to 1.18: -
Answer-.14 percent

Holdup Bank has an issue of preferred stock with a stated dividend of $7 that just sold
for $87 per share. What is the bank's cost of preferred: - Answer-8.05 percent

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