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Final Exam- LSUS- FIN701 Exam Questions and Answers
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A company's current cost of capital is based on: - Answer-both the returns currently required by its debtholders 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? Assu...

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  • August 23, 2024
  • 6
  • 2024/2025
  • Exam (elaborations)
  • Questions & answers

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  • final exam lsus fin701 exam questions and answer
  • a companys current cost of capital is based on

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Final Exam- LSUS- FIN701 Exam
Questions and Answers
A company's current cost of capital is based on: - Answer-both the returns currently
required by its debtholders 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

Which one of these describes an exception to the registration filing requirement of the
SEC? - Answer-Issues of less than $5 million

The Securities and Exchange Commission: - Answer-reviews registration statements to
ensure they comply with current laws and regulations

What is a prospectus? - Answer-A document that describes the details of a proposed
security offering along with relevant information about the issuer

Which one of the following is a preliminary prospectus? - Answer-Red herring

Advertisements in a financial newspaper announcing a public offering of securities,
along with a list of the investment banks handling the offering, are called: - Answer-
tombstones

What is an issue of securities that is offered for sale to the general public on a direct
cash basis called? - Answer-General Cash offer

Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that
the company is issuing additional shares and he is being given a chance to purchase
some of these shares prior to the shares being offered to the general public. What is
this type of an offer called? - Answer-Rights offer

Executive tours has decided to go public and has hired an investment firm to handle the
offering. The investment firm is serving as a(n): - Answer-underwriter

Underwriters generally: - Answer-accept the risk of selling the new securities in
exchange for the gross spread

A syndicate can best be defined as a: - Answer-group of underwriters sharing the risk of
selling a new issue of securities.

Jones & Co. recently went public and received $23.07 a share on their entire offer of
30,000 shares. Keeser & Co. served as the underwriter and sold 28,500 shares to the
public at an offer price of $26.50 a share. What type of underwriting was this? - Answer-
Firm commitment

Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the
public. The underwriters charged a fee of 8.2 percent and paid Blue Stone Builders the
uniform auction price for each of those shares. Which one of the following terms best
describes this underwriting? - Answer-Dutch Auction

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