If a firm's bonds are currently yielding 8% in the marketplace, why would the firm's cost of debt be lower?

a) interest rates have changed
b) additional debt can be issued more cheaply than the original debt
c) there should be no difference; cost of debt is the same as the bond's market yield
d) interest is tax-deductible

Using the constant divident growth model for common stock, if Po goes up...

a) the assumed cost goes up
b) the assumed cost goes down
c) the assumed cost remains unchanged
d) need further information

Expected cash dividends are $2.50, the dividend yield is 6%, flotation costs are 4%, and the growth rate is 3%. Compute cost of new common stock...

a) 9.00%
b) 9.25%
c) 9.18%
d) 9.44%

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

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A firm's stock is selling for $85. The dividend yield is 5%. A 7% growth rate is expected for the common stock. The firm's tax rate is 32%. What is the firm's cost of common equity?

a) 8.16%
b) 12.00%
c) 12.35%
d) can not be determined

A firm's stock is selling for $78. The next annual divident is expected to be $2.70. The growth rate is 9%. The flotation cost is $5.00. What is the cost of retained earnings?

a) 13.09%
b) 12.46%
c) 12.70%
d) none of the above

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

We add depreciation to new income to arrive at a true profit picture

True or False?

The payback method is not really a theoretically correct approach.

True or False?

In a replacement decision, a book loss on an old asset can be a valuable feature.

True or False?

In most capital budgeting decisions the emphasis is on reported earnings rather than cash flows.

True or False?

The cash inflow from the sale of an old asset decreases the cost of the new asset.

True or False?

If an asset is sold for a price above its book value, the difference is considered taxable income to the firm.

True or False?

Under the net present value method, cash flows are assumed to be reinvested at the firm's weighted average cost of capital.

True or False?

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In using the internal rate of return method, it is assumed that cash flows can be reinvested at...

a) the cost of equity
b) the cost of capital
c) the internal rate of return
d) the prevailing interest rate

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