problem1. Which of the following is considered the capital component for purpose of computing the weighted average cost of capital (WACC)?

A) Accruals.

B) Accounts receivables.

C) Preferred stock.

D) Accounts payable.

problem2. The cost of particular source of capital (preferred stock, debt, common stock) is equivalent to the investor's required rate of return after adjusting for the effects of both flotation costs (that is, the commission fee for the issuance of bonds and stocks) and corporate taxes.

True

False

problem3. A preferred stock is valued as:

A) Fixed coupon rate bond.

B) Constant growth stock.

C) Perpetuity.

D) Zero coupon stock.

problem4. Which one of the following is a logical assumption concerning capital structure weights?

A) The weights are stable over time.

B) A new bond issue will lessen the weight of firm's preferred stock.

C) The redemption of bond issue will increase the weight of firm's debt.

D) The issuance of additional shares of common stock will not change the weight of preferred stock.

problem5. If D represents debt, P represents preferred and E represents equity, then the capital structure weight of debt is evaluated as:

A) D/E

B) D/ (D+E+P)

C) D/ (D+E)

D) D/ (E+P)

problem6. Assume your company has an equity beta of 0.58 and current risk-free rate is 6.1%. When the anticipated market risk premium is 8.6%, what is your cost of equity capital?

A) 6.1%

B) 11.1%

C) 8.6%

D) 14.7%.

problem7. Bouchard Company's stock sells for $20 per share, its last dividend (D0) was $1.00, and its growth rate is stable 6%. What is its cost of common stock?

A) 11.0%

B) 5.3%

C) 11.3%

D) 11.6%

problem8. When a firm's before-tax cost of debt is 10% and the firm has 30% marginal tax rate, what’s the firm's after-tax cost of debt?

A) 7.0%

B) 10.0%

C) 3.0%

D) None of above is correct.

problem9.  A company has preferred stock which can be sold for $50 per share. The preferred stock pays an annual dividend $5. Thus, the cost of preferred stock is:

A) 5.67%

B) 6.00%

C) 10.0%

D) 9.43%

problem10. MS Energy has target capital structure of 30% debt, 60% common equity10, and % preferred stock. The company's after-tax cost of debt is 5%, its cost of preferred stock is 8%, and its cost of retained earnings is 12%. What is company's weighted average cost of capital when retained earnings are used to fund common equity portion?

A) 8.0%

B) 10.20%

C) 9.50%

D) 12.80%.