30 Questions
What does the term 'cost of capital' refer to?
A weighted average cost of financing sources
Which of the following is NOT a method a firm can use to raise capital?
Mutual Funds
What does the cost of capital represent for financial managers?
A cost of raising funds
How is the cost of debt for an issuing firm calculated?
Adjusted for flotation costs and taxes
In the context of financing, what does EBIT stand for?
Earnings Before Interest and Taxes
What is calculated in order to evaluate new investment opportunities?
WACC
How does the tax rate affect the after-tax cost of debt?
It decreases the after-tax cost of debt
What is one of the objectives related to the concept of cost of capital?
Using the cost of capital for investment evaluation
What does a firm pay to stockholders that affects retained earnings?
Dividends
In the example given, why will the bond sell for par despite paying the market rate?
Because it pays the market rate
Which type of cost is NOT included in the calculation of WACC?
Cost of Prepaid Expenses
How do investors view the rate of return on a security?
A benefit of investing
What is the pre-tax cost of debt for the firm?
10.61%
How is the after-tax cost of debt calculated for the firm?
Kd = kd (1 - T)
What is the formula to calculate the cost of preferred stock?
kp = D * NPo
If a company issues preferred stock with a $10 dividend and $80 price (after flotation costs), what would be the cost of preferred stock?
11.25%
How can companies raise common equity according to the text?
By retaining earnings
What is the cost of common equity for a company that retains earnings after paying common dividends?
Depends on the firm's net income
What are the two sources of common equity mentioned in the text?
Internal common equity (retained earnings) and external common equity (new common stock issue)
Which method is used to estimate the cost of internal equity according to the text?
Dividend Growth Model
Which model provides a basis for evaluating investor's required rates of return on common equity?
Capital Asset Pricing Model (CAPM)
What does CAPM stand for in the context of the text?
Capital Asset Pricing Model
Which variable does the Capital Asset Pricing Model (CAPM) depend on?
Risk-free rate and systematic risk of common stock's returns relative to the market
What does the Dividend Growth Model equation D1 kc = Po + g represent?
The cost of internal equity estimation
What is the market risk premium in this scenario?
5.4%
What is the beta coefficient of G-Mart’s common stock?
1.2
If a new issue is offered, what are the floatation costs as a ratio to the stock price?
10%
What is G-Mart’s cost of internal common stock?
13.2%
What is the cost of external common stock for G-Mart?
14.55%
What is the expected growth rate for Dian Co.'s dividend?
-0.146%
Test your knowledge on calculating pre-tax and after-tax cost of debt, as well as the cost of preferred stock with consideration for flotation costs. This quiz covers topics related to bond valuation, tax deductions, and accounting for issuance costs.
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