Exam 3 Practice
t
Finance 333
Practice Examination 3
1. Given the following information on S & G Inc. capital structure, compute the company's weighted average cost of capital. Type of Percent of Before Tax Capital Capital Structure Component Cost Bonds 40% 7.5% Preferred Stock 5% 11% Common Stock (Internal Only) 55% 15% The company's marginal tax rate is 40%. a. 13.3% b. 7.1% c. 10.6% d. 10%
2. In general, the most expensive source of capital is: a. preferred stock b. new common stock c. debt d. retained earnings
3. Sonderson Corporation is undertaking a capital budgeting analysis. The firm's beta is 1.5. The rate on 6 month t-bills is 5%, and the return on the S&P 500 index is 12%. The firm can issue external equity with flotation costs of 14%. What is the appropriate cost for retained earnings in determining the firm's cost of capital? a. 0 b. 15.5% c. 17.7% d. 10.5%
4. The cost of preferred stock is equal to: a. the preferred stock dividend divided by market price b. the preferred stock dividend divided by its par value c. (1 - tax rate) times the preferred stock dividend divided by net price d. preferred stock dividend divided by the net market price
5. The XYZ Company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required rate of return on debt is 9 percent and the required rate of return on equity is 14 percent. If the company is in the 40 percent tax bracket, what is the firm's cost of capital? a. 14.0 b. 9.0 c. 10.6 d. 11.5
6. In capital budgeting analysis, when computing the weighted average cost of capital, the CAPM approach is typically used to
Finance 333
Practice Examination 3
1. Given the following information on S & G Inc. capital structure, compute the company's weighted average cost of capital. Type of Percent of Before Tax Capital Capital Structure Component Cost Bonds 40% 7.5% Preferred Stock 5% 11% Common Stock (Internal Only) 55% 15% The company's marginal tax rate is 40%. a. 13.3% b. 7.1% c. 10.6% d. 10%
2. In general, the most expensive source of capital is: a. preferred stock b. new common stock c. debt d. retained earnings
3. Sonderson Corporation is undertaking a capital budgeting analysis. The firm's beta is 1.5. The rate on 6 month t-bills is 5%, and the return on the S&P 500 index is 12%. The firm can issue external equity with flotation costs of 14%. What is the appropriate cost for retained earnings in determining the firm's cost of capital? a. 0 b. 15.5% c. 17.7% d. 10.5%
4. The cost of preferred stock is equal to: a. the preferred stock dividend divided by market price b. the preferred stock dividend divided by its par value c. (1 - tax rate) times the preferred stock dividend divided by net price d. preferred stock dividend divided by the net market price
5. The XYZ Company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required rate of return on debt is 9 percent and the required rate of return on equity is 14 percent. If the company is in the 40 percent tax bracket, what is the firm's cost of capital? a. 14.0 b. 9.0 c. 10.6 d. 11.5
6. In capital budgeting analysis, when computing the weighted average cost of capital, the CAPM approach is typically used to