Cost of Debt and Preferred Stock Calculation Quiz
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Questions and Answers

What does the term 'cost of capital' refer to?

  • The total expenses incurred by the firm
  • An additional financial burden on the firm
  • A weighted average cost of financing sources (correct)
  • The amount of capital raised by the firm
  • Which of the following is NOT a method a firm can use to raise capital?

  • Mutual Funds (correct)
  • Preferred Stock
  • Common Stock
  • Bonds
  • What does the cost of capital represent for financial managers?

  • An increase in profits
  • A benefit of investing
  • A cost of raising funds (correct)
  • A decrease in operational costs
  • How is the cost of debt for an issuing firm calculated?

    <p>Adjusted for flotation costs and taxes</p> Signup and view all the answers

    In the context of financing, what does EBIT stand for?

    <p>Earnings Before Interest and Taxes</p> Signup and view all the answers

    What is calculated in order to evaluate new investment opportunities?

    <p>WACC</p> Signup and view all the answers

    How does the tax rate affect the after-tax cost of debt?

    <p>It decreases the after-tax cost of debt</p> Signup and view all the answers

    What is one of the objectives related to the concept of cost of capital?

    <p>Using the cost of capital for investment evaluation</p> Signup and view all the answers

    What does a firm pay to stockholders that affects retained earnings?

    <p>Dividends</p> Signup and view all the answers

    In the example given, why will the bond sell for par despite paying the market rate?

    <p>Because it pays the market rate</p> Signup and view all the answers

    Which type of cost is NOT included in the calculation of WACC?

    <p>Cost of Prepaid Expenses</p> Signup and view all the answers

    How do investors view the rate of return on a security?

    <p>A benefit of investing</p> Signup and view all the answers

    What is the pre-tax cost of debt for the firm?

    <p>10.61%</p> Signup and view all the answers

    How is the after-tax cost of debt calculated for the firm?

    <p>Kd = kd (1 - T)</p> Signup and view all the answers

    What is the formula to calculate the cost of preferred stock?

    <p>kp = D * NPo</p> Signup and view all the answers

    If a company issues preferred stock with a $10 dividend and $80 price (after flotation costs), what would be the cost of preferred stock?

    <p>11.25%</p> Signup and view all the answers

    How can companies raise common equity according to the text?

    <p>By retaining earnings</p> Signup and view all the answers

    What is the cost of common equity for a company that retains earnings after paying common dividends?

    <p>Depends on the firm's net income</p> Signup and view all the answers

    What are the two sources of common equity mentioned in the text?

    <p>Internal common equity (retained earnings) and external common equity (new common stock issue)</p> Signup and view all the answers

    Which method is used to estimate the cost of internal equity according to the text?

    <p>Dividend Growth Model</p> Signup and view all the answers

    Which model provides a basis for evaluating investor's required rates of return on common equity?

    <p>Capital Asset Pricing Model (CAPM)</p> Signup and view all the answers

    What does CAPM stand for in the context of the text?

    <p>Capital Asset Pricing Model</p> Signup and view all the answers

    Which variable does the Capital Asset Pricing Model (CAPM) depend on?

    <p>Risk-free rate and systematic risk of common stock's returns relative to the market</p> Signup and view all the answers

    What does the Dividend Growth Model equation D1 kc = Po + g represent?

    <p>The cost of internal equity estimation</p> Signup and view all the answers

    What is the market risk premium in this scenario?

    <p>5.4%</p> Signup and view all the answers

    What is the beta coefficient of G-Mart’s common stock?

    <p>1.2</p> Signup and view all the answers

    If a new issue is offered, what are the floatation costs as a ratio to the stock price?

    <p>10%</p> Signup and view all the answers

    What is G-Mart’s cost of internal common stock?

    <p>13.2%</p> Signup and view all the answers

    What is the cost of external common stock for G-Mart?

    <p>14.55%</p> Signup and view all the answers

    What is the expected growth rate for Dian Co.'s dividend?

    <p>-0.146%</p> Signup and view all the answers

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