Cost of Capital & WACC
Test your proficiency of cost of capital concepts, cost of debt, cost of preferred stock, cost of equity, cost of retained earnings, dividend discount models, capital asset pricing model, and weighted average cost of capital.

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For which of the following costs is it generally necessary to apply a tax adjustment to a yield measure?
1 point
Clear selection
The overall (weighted average) cost of capital is composed of a weighted average of __________.
1 point
Clear selection
The cost of retained earnings is equal to:
1 point
Clear selection
Lei-Feng, Inc.'s $100 par value preferred stock just paid its $10 per share annual dividend. The preferred stock has a current market price of $96 a share. The firm's marginal tax rate (combined federal and state) is 40 percent, and the firm plans to maintain its current capital structure relationship into the future. The component cost of preferred stock to Lei-Feng, Inc. would be closest to .
2 points
Clear selection
The common stock of a company must provide a higher expected return than the debt of the same company because
1 point
Clear selection
What is the overall (weighted average) cost of capital in the following situation? The firm has $10 million in long-term debt, $2 million in preferred stock, and $8 million in common equity -- all at market values. The before-tax cost for debt, preferred stock, and common equity forms of capital are 8%, 9%, and 15%, respectively. Assume a 40% tax rate.
2 points
Clear selection
Jacques Fauxpas is attempting to determine his company's weighted-average cost of capital. His first step was to determine the required rates of return for his company's long-term debt, preferred stock, and common stock. He then adjusted these required rates of return by multiplying each return by one minus the company's marginal tax rate. Jacques is planning on using these three adjusted required return figures as his component costs of capital. How is Jacques doing so far?
2 points
Clear selection
Socks-N-Shoes, Inc., used a proxy company to calculate an unlevered beta of 0.90 for its Socks Division. The firm's corporate cost of debt is 5% on an after-tax basis. Sock-N-Shoes finances its projects with a roughly 80%/20% mix of debt and equity. The market has an expected rate of return of 16% and the risk-free rate is 6%. The required rate of return (divisional cost of capital) for the Socks Division should be closest to which of the following four answers?
2 points
Clear selection
Tidewater Fishing has a current beta of 1.48. The market risk premium is 8.9 percent and the risk-free rate of return is 3.2 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.60?
2 points
Clear selection
The cost of debt is measured by:
1 point
Clear selection
Regardless of the type of asset being acquired, the appropriate discount rate is:
1 point
Clear selection
Market values are often used in computing the weighted average cost of capital because
1 point
Clear selection
Grill Works and More has 8 percent preferred stock outstanding that is currently selling for $49 a share. The market rate of return is 14 percent and the firm's tax rate is 37 percent. What is the firm's cost of preferred stock?
2 points
Clear selection
The cost of capital is best calculated with:
1 point
Clear selection
The cost of equity capital is all of the following EXCEPT:
2 points
Clear selection
In calculating the proportional amount of equity financing employed by a firm, we should use:
2 points
Clear selection
The cost of preferred stock is computed the same as the:
1 point
Clear selection
To compute the required rate of return for equity in a company using the CAPM, it is necessary to know all of the following EXCEPT:
1 point
Clear selection
For an all-equity financed firm, a project whose expected rate of return plots-----------should be rejected.
1 point
Clear selection
The least expensive form of financing for the firm is:
1 point
Clear selection
A single, overall cost of capital is often used to evaluate projects because:
2 points
Clear selection
Chelsea Fashions is expected to pay an annual dividend of $0.80 a share next year. The market price of the stock is $22.40 and the growth rate is 5 percent. What is the firm's cost of equity?
2 points
Clear selection
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