Chapter 11 – Cost Of Capital (Block)
1. Capital structure is a firm’s mix of
a. Short-term financing
b. Long-term financing
c. Neither (a) or (b)
2. Which form of capital finance is considered less expensive because of the tax effect?
a. Equity financing
b. Debt financing
c. Personal financing
3. The after-tax cost of debt where the yield is 14.0 percent and the corporate tax rate is 35 percent is
a. 4.9%
b. 9.10%
c. 14.0%
4. United Business Forms’ capital structure is as follows:
Debt 65%
Preferred stock5%
Common equity 30%
Under this debt-oriented arrangement, the after-tax cost of debt is 9.8 percent; the cost of preferred stock is 12 percent; and the cost of common equity (in the form of retained earnings) is 15.5 percent. The weighted average cost of capital is
a. 4.65%
b. 6.37%
c. 11.62% ;
5. The overall weighted average cost of capital is used instead of costs for specific sources of funds because
a. Use of the cost for specific sources of capital would make investment decisions inconsistent.
b. A project with the highest return would always be accepted under the specific cost criteria.
c. Investments funded by low cost debt would have an advantage over other investments.
d. Both a and c are correct.
6. Debreu Beverages has an optimal capital structure that is 50% common equity, 40% debt, and 10% preferred stock. Debreu's pretax cost of equity is 12%. Its pretax cost of preferred equity is 7%, and its pretax cost of debt is also 7%. If the corporate tax rate is 35%, what is the weighted average cost of capital?
a. Between 7% and 8%
b. Between 8% and 9%
c. Between 9% and 10%
d. Between 10% and 12%
7. For a firm paying 7% for new debt, the higher the firm's tax rate
a. The higher the after-tax cost of debt.
b. The lower the after-tax cost of debt.
c. After-tax cost is unchanged.
d. Not enough information to judge.

8. A firm is paying an annual dividend of $3.63 for its preferred stock which is selling for $62.70. There is a selling cost of $3.30. What is the after-tax cost of preferred stock if the firm's tax rate is 33%?
a. 2.02%
b. 4.09%
c. 5.79%
d. 6.11%
9. The cost of equity capital in the form of new common stock will be higher than the cost of retained earnings because of
a. The existence of taxes.
b. The existence of flotation costs.
c. Investors' unwillingness to purchase additional shares of common stock.
d. The existence of financial leverage.

10. Within the capital asset pricing model
a. The risk-free rate is usually higher than the return in the market.
b. The higher the beta the lower the required rate of return.
c. Beta measures the volatility of an individual stock relative to a stock market index.
d. Two of the above are true.
Chapter 12 - The Capital Budgeting Decision (Block)
11. A capital investment evaluation method designed to measure the length of time required to recoup an initial investment.
a.Payback period&nbs p;
b.Net present value
c.Accounting rate of return
12. A capital investment evaluation method that discounts future cash flows to their present value; the present value of all the future cash flows is compared with the amount of the proposed expenditure to determine if the investment should be made.
a. Payback period
b. Net present value ;
c. Accounting rate of return
d. Discounted payback period
Use information given below to complete the following two (2) questions:
Recycle Paper Company utilizes the payback method to evaluate investment proposals. It is presently considering two investment opportunities as indicated below.The cost of capital for Recycle Paper Company is 14%.
Investment AInvestment B
Net Investment = $100,000Net Investment = $500,000
ExpectedExpected
YearCash InflowsYearCash Inflows
1$25,0001$125,000
2$25,0002$250,000
3$25,0003$300,000
4$25,0004$225,000
5$25,0005$100,000
13. Compute the payback period for Investment A (round to 1 decimal place if needed).
a. 2.4 years
b. 3.5 years
c. 4.0 years
14. Compute the net present value for Investment A.
a. -$14,175
b. $14,175
c. -$26,275
d. $26,275
15. In most capital budgeting decisions the emphasis is on
a.Accounting net income
b.Operating net income
c.Cash flow
d.Accrual income
16. Which capital investment evaluation method does not require the use of time value of money technique?
a. Payback period
b. Net present value
c. Internal rate of return
17. Cash flow can be said to equal
a. Operating income less taxes plus depreciation.
b. Operating income less taxes.
c. Operating income before depreciation and taxes plus depreciation.
d. Operating income after taxes minus depreciation.
18. Assuming that a firm has no capital rationing constraint and that a firm's investment alternatives are not mutually exclusive, the firm should accept all investment proposals
a. For which it can obtain financing.
b. That have a positive net present value.
c. That have positive cash flows.
d. That provide returns greater than the after-tax cost of debt.
19. The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method
a. Assumes that cash flows are reinvested at the project's internal rate of return.
b. Concentrates on the liquidity aspects of investment projects.
c. Assumes that cash flows are reinvested at the firm's weighted average cost of capital.
d. None of these.
20. Capital rationing assumes:
a. A limited amount of capital is available.
b. A limited amount of investments are available.
c. Maximum profitability will be obtained.
d. B and C.
Chapter 14 (Capital Markets)
21. The major supplier of funds for investment in the whole economy is
a. Businesses
b. Households
c. Government
d. Financial institutions
22. The difference between brokers and dealers is that
a. Brokers can trade only on organized exchanges and dealers can trade only over-the-counter
b. Dealers own the securities they trade and brokers act as agent for buyer and seller
c. Brokers own the securities they trade and dealers act as agent for buyer and seller
d. There is no difference
23. Corporations prefer bonds over preferred stock for financing their operations because
a. Preferred stocks required a dividend
b. Bond interest rates change with the economy while stock dividends remain constant
c. The after-tax cost of debt is less than the cost of preferred stock
d. None of the above
24. A firm that buys an issue of securities from a company and resells it to the public is called
a. Initial public offering firm
b. Venture capitalist
c. Underwriter&n bsp;
25. Which of the following will be less expensive to raise when a company requires funds?
a. External Funds
b. Government Funds
c. Internal Funds

Not 100% sure about 25
26. Transactions in currently outstanding securities are traded in
a. Primary markets
b. Secondary markets
c. Overseas markets
27. Corporations prefer bonds over preferred stock for financing their operations because
a. Preferred stocks require a dividend.
b. Bond interest rates change with the economy while stock dividends remain constant.
c. The after-tax cost of debt is less than the cost of preferred stock.
d. None of these.
28. Which of the following is an internal source of funds?
a. Cash flow from depreciation (tax shield)
b. Net loss
c. Repurchase of debt securities
d. Bank loan
29. Which of the following are benefits of financial intermediaries?
a. Increase market liquidity
b. Provide a direct market for investors
c. Act as agents of the government
d. Only a and b
30. The Securities Act of 1933 is primarily concerned with
a. Original issues of securities.
b. Secondary trading of securities.
c. National securities market.
d. Protecting customers of bankrupt securities firms.
31. The Securities Exchange Act of 1934 is primarily concerned with
a. A central market system.
b. Regulation of organized exchanges.
c. Protecting customers of bankrupt securities firms.
d. Original issues of securities.
Chapter 15 (Investment Banking: Public and Private Placement)
32. Which of the following is considered an advantage (for the corporation) of going public?
a. The president becomes a public relations person
b. Extensive and time-consuming reporting requirements
c. Increased liquidity for the corporation’s shareholders
d. The cost of flotation
33. Publicly-traded companies generally have
a. More pressure for short-term performance
b. Less pressure for short-term performance
c. Very strong stock market performance
d. Low distribution costs in selling securities
34. Which of the following is a characteristic of leveraged buyouts?
a. Buyouts are usually financed by debt
b. Some corporate assets are often sold after the buy-out is completed
c. Funds for the buy-out are raised through securities markets
d. All of the above are characteristics
35. Publicly-traded companies generally have
a. More pressure for short-term performance
b. Less pressure for short-term performance
c. Very strong stock market performance
d. Low distribution costs in selling securities
36. Which of the following is a characteristic of leveraged buyouts?
a. Buyouts are usually financed by debt
b. Some corporate assets are often sold after the buy-out is completed
c. Funds for the buy-out are raised through securities markets
d. All of the above are characteristics
37. When an investment banker acts as an "underwriter" he
a. Gives a "firm commitment" to purchase the securities from the corporation at a set price.
b. The company suffers a decline in earnings after taxes.
c. May sell as many securities as possible and return the rest unsold.
d. May give advice to management.
38. In issuing stock, the term "spread" refers to
a. The profit the managing investment banker gets for an issue of stock.
b. The disparity between the initial asking price and the average price for the stock issued some months
later.
c. The difference between what the corporation gets for new issues of stock and what the public pays for
the stock.
d. The total cost to the corporation for issuing new stock.
39. Generally, the total cost to issue securities (as a percent of total proceeds)
a. Is greater for common stock than for debt and increases as the size of the issue increases.
b. Is greater for debt than for common stock and decreases as the size of the issue increases.
c. Is greater for debt than for common stock and increases as the size of the issue increases.
d. Is greater for common stock than for debt and decreases as the size of the issue increases.
40. Which of the following is considered an advantage (for the corporation) of going public?
a. The president becomes a public relations man.
b. Extensive and time-consuming reporting requirements.
c. Increased liquidity for the corporation's shareholders.
d. The cost of flotation.