Please write down your choice in the blank before the question. Two points each
ID: 2790509 • Letter: P
Question
Please write down your choice in the blank before the question. Two points each and 10 points in total.
__b___ Which of the following is NOT a capital component, i.e., a source of investor-supplied capital?
a-Notes payable.
b-Account payable.
c-Long-term debt.
d-Preferred stock.
_____ Which of the following statements is NOT CORRECT?
a-The cost of capital used in capital budgeting should reflect the average cost of the various types of capital a firm uses to finance the projects.
b-The cost of equity is a market-determined variable in the sense that it’s shareholders’ required return.
c-The after-tax cost of debt, which is lower than then before-tax cost, is used as the component cost of debt for purposes of developing the firm’s WACC.
d-The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of preferred dividends received by a corporation may be excluded from the receiving company’s taxable income.
_____ Which of the following statements is CORRECT?
a-Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them.
b-The firm’s cost of external equity raised by issuing new stock is the same as the required rate of return on the firm’s retained earnings.
c-A firm’s cost of equity is highly dependent upon the risk level of the firm.
d-A firm’s cost of equity is inversely related to changes in the firm’s tax rate.
__d___ The discount rate assigned to an individual project should be based on the
a-Firm's weighted average cost of capital.
b-Average of the firm's overall cost of capital for the past five years.
c-Current risk level of the overall firm.
d-Risks associated with the use of the funds required by the project.
_____ Which of the following would most likely cause many firm’s cost of capital to rise?
a- A decrease in the market interest rates.
b-The credit crisis is over.
c-Investors become less risk averse.
d-An increase in corporate income tax.
Explanation / Answer
1-
accounts payable
because it results from credit purchase of supplies
2-
answer is D
The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of preferred dividends received by a corporation may be excluded from the receiving company’s taxable income.
3-
answer is B
b-The firm’s cost of external equity raised by issuing new stock is the same as the required rate of return on the firm’s retained earnings.
4-
answer is D
d-Risks associated with the use of the funds required by the project.
5-
Answer is A
a- A decrease in the market interest rates.
1-
accounts payable
because it results from credit purchase of supplies
2-
answer is D
The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of preferred dividends received by a corporation may be excluded from the receiving company’s taxable income.
3-
answer is B
b-The firm’s cost of external equity raised by issuing new stock is the same as the required rate of return on the firm’s retained earnings.
4-
answer is D
d-Risks associated with the use of the funds required by the project.
5-
Answer is A
a- A decrease in the market interest rates.