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Question 1

JB Associates earned a net income of $4.5 million in 2009. The company announced
dividends of $0.818 per share, which will grow at a constant rate forever. Given that the
weighted average number of common shares outstanding in 2009 is 2.2 million and that the
company’s book value of equity in 2008 and 2009 is $22 million and $28 million,
respectively, its annual growth rate in dividends is closest to:
a) 10.8%
b) 10.4%
c) 10.6%

Question 2
A project with multiple IRRs will most likely be characterized by:
a) alternating streams of cash outflow and inflow.
b) one significant outflow followed by a series of cash inflows.
c) a series of cash outflows followed by a series of cash inflows.

Question 3
A recent offering from Bell Curve Systems, Co. are a seven-year maturity preferred shares
with annual dividends of $15. The par value of the shares is $120. The shareholders require
a 9% return from the shares. The market value of Bell Curve's share is closest to:
a) $170.64
b) $123.08
c) $141.14

Question 4
The weighted-average cost of capital (WACC) often uses target weights. In practice, analysts
often estimate the target weightings using:
a) The optimal weightings, which will minimize the cost of capital.
b) The weightings in the current capital structure, based on market values.
c) The weightings based on the book value of the components of the company's capital
structure.

Question 5
The cost of debt of a company will least likely:
a) increase if the bond is callable.
b) increase if the bond is putable.
c) include both the cost of operating and capital leases.

Question 6
A developing country has a sovereign yield spread of 4.5 percent and its:
i. government bond, when measured in terms of a developed country's
currency, is more volatile than its equity market, and
ii. equity market is less volatile the developed country's equity market.

An analyst assessing the developing country can conclude that the country's risk (equity)
premium will most likely be:
a) less than its sovereign yield spread.
b) zero, as its markets are less volatile.
c) more than its sovereign yield spread.

Question 7
Which of the following is not true?
a) The WACC decreases as the amount of capital being raised is increased.
b) The point at which the marginal cost of capital curve and the investment
opportunity schedule meet is described as the optimal capital budget.
c) If the IRR of a project is greater than the marginal cost of capital, the project must
be taken.

Question 8
An equity analyst at an investment firm is estimating the cost of capital for Latham Gore,
Inc. (LGI). The analyst plans to use her estimate in assessing the effect of LGI's new projects
on the company's value. On a recent earnings release conference call, the analyst heard the
LGI's CFO state the following:
“LGI has a long-term target capital structure of 40 percent debt and 60 percent equity. Our
current capital structure differs from this target and this has been the case for many years.
Over the coming years, we plan to move toward our target.”
From the recently released financial statements and her own calculations, the analyst has
gathered the following data for Latham Gore:
Current Levels ($)
Debt at book value 130
Debt at market value 150
Shareholders' equity at book value 20
Shareholders' equity at market value 100
The debt and equity weights the analyst should use in finding LGI's cost of capital are closest
to:
a) 40 percent debt and 60 percent equity.
b) 60 percent debt and 40 percent equity.
c) 87 percent debt and 13 percent equity.

Question 9
Which of the following statements about the cost of equity of a company calculated using
the DDM is most likely true?
a) When the stock price of a company increases at a higher rate than its dividend, its cost of
equity will increase.
b) A company's cost of equity is equal to its dividend yield if all its prospective investments
have an internal rate of return (IRR) less than their cost of capital.
c) A company's earnings retention rate is high when the future investments have a net
present value (NPV) of zero.

Question 10
The following information relates to Welhem Industries and the market.
Risk-free rate of return: 4%
Beta for Welhem's common stock: 1.2
Current annual dividend yield of equity market index: 9%
Forward annual dividend yield of equity market index: 10%
Dividend growth rate of equity market index: 2%
Current market value of Welhem's stock: $18
Welhem's cost of equity will be closest to:
a) 12.4%.
b) 13.6%.
c) 14.4%.

Question 11
Consider the following statements:
Statement 1: A company’s existing debt covenants that restrict it from issuing debt with
similar seniority cause its marginal cost of capital to increase as additional capital is raised.
Statement 2: Deviation from its target capital structure over the short term causes the
marginal cost of capital to increase as additional capital is raised.
Which of the following is most likely?
a) Only Statement 1 is incorrect.
b) Only Statement 2 is incorrect.
c) Both statements are correct.

Question 12
Weber & Wagner, GmbH, an Austrian company traded on the Vienna stock exchange
(Wiener Börse), is considering expansion into Russia. An analyst at a British investment
management company that owns shares in the company is worried that the expansion may
change the risk profile of Weber & Wagner. The analyst has gathered the following
information:
Weber & Wagner's marginal tax rate 25 percent
Market value of Weber & Wagner's equity €850 million (€21.25 per share)
Weber & Wagner's equity beta 0.8
Weber & Wagner's most recent common dividend €40 million (€1.00 per share)
Weber & Wagner's growth rate 3.0 percent
Risk-free rate of interest, Austria 1.5 percent
Equity risk premium, Austria 6.5 percent
Risk-free rate of interest, Russia 3.5 percent
Equity risk premium, Russia 7.2 percent
If the capital asset pricing model (CAPM) is used, Weber & Wagner's cost of equity capital
for its typical project is closest to:
a) 5.5 percent.
b) 6.7 percent.
c) 9.3 percent.

Question 13
AM Industries (AMI) is based in a country that taxes the first $1 million of corporate pretax
profits at 10 percent and any corporate pretax profits above $1 million are taxed at 30
percent. AMI earned pretax profits of $2 million last year and expects to earn pretax profits
of $3 million in the current year. In calculating the company's weighted average cost of
capital (WACC), the tax rate an analyst will use to find the after-tax debt cost is closest to:
a) 20 percent.
b) 23 percent.
c) 30 percent.

Question 14
A company is considering a project in a developing country. An analyst has determined that
the asset and project betas are 0.80 and 1.60, respectively. In addition, the analyst has
estimated a sovereign yield spread of 3.0 percent and a country (equity) risk premium of 6.0
percent. Which of the following statements is most likely correct?
a) The annualized standard deviation of the developing country's equity index is
approximately twice the annualized standard deviation of the developed country's
equity index.
b) The annualized standard deviation of the developing country's equity index is
approximately twice the annualized standard deviation of the developing country's
sovereign bond market in terms of the developed market currency.
c) The annualized standard deviation of the developing country's sovereign bond
market in terms of the developed market currency is approximately twice the
annualized standard deviation of the developed country's sovereign bond market.

Question 15
Which of the following is least likely a method for calculating the cost of debt?
a) Yield-to-maturity approach
b) Bond yield plus risk premium approach
c) Debt rating approach
Question 16
Dolphin Inc. has a return on equity of 15%. Its next year’s dividend is forecasted to be $1.52
per share and the current stock price is $43. Given that the company’s cost of equity is 16%,
its earnings retention rate is closest to:
a) 15.50%
b) 83.10%
c) 60.43%

Question 17
An analyst has gathered the following information on a company and the market:
Current market price of company's common shares $10.20
Common stock dividend yield, based on most recent dividend paid 2.45 percent
Expected dividend payout rate 20 percent
Expected return on equity (ROE) 15 percent
Beta for company's common stock 1.4
Asset beta for company's industry 0.9
Expected rate of return for the market portfolio 10 percent
Risk-free rate of return 4 percent
Using the dividend discount model (DDM) approach, the cost of equity is closest to:
a) 14.0 percent.
b) 14.5 percent.
c) 14.7 percent.

Question 18
Percea Corporation pays a consultant $20,000 to analyze a new investment proposal. The
company hires an investment bank to underwrite a $12 million equity issue to finance the
new project. Flotation costs are 2% of the total amount of capital raised. The company uses
NPV to make capital budgeting decisions. The most preferred treatment of fees will:
a) increase the initial cash outflow by $260,000.
b) ignore consultant fees of $20,000 and adjust the discount rate for the project to
account for flotation costs.
c) ignore consultant fees of $20,000 and increase the initial cash outflow by $240,000.

Question 19
Beta estimates are least likely sensitive to:
a) The choice of the market index against which stock returns are regressed.
b) The capital structure of the company.
c) The length of the estimation period.
Question 20
An analyst is calculating the weighted average cost of capital (WACC) for STR Industries. The
analyst has gathered the following data for his calculation:
Market value of STR's equity $5.6 billion
Common shares outstanding for STR 200 million
Pretax cost of new debt for STR 5.5 percent
Market value of STR's debt $12.3 billion
STR's equity beta 1.2
Next year's dividend for STR's shares $1.40 per share
STR's growth rate 3.5 percent
Risk-free rate of interest 2.0 percent
Equity risk premium 4.0 percent
STR's marginal tax rate 30 percent
The company's WACC using the dividend discount model is closest to:
a) 4.8 percent.
b) 5.3 percent.
c) 6.4 percent.

Question 21
Rovin Wells, CFA, wants to investigate the beta of Threadless Co. Spindle Co. is a company
with similar risks that has almost the same business as that of Threadless Co. Threadless's
debt-to-equity ratio is higher compared to Spindle's. Furthermore, Spindle has an equity
beta of 0.98. Threadless has a D/E ratio of 1.5 and Spindle has a D/E ratio of 0.82. The tax
rates for Threadless and Spindle are 40% and 36%, respectively.
i.
The unlevered beta of Spindle is:
a) .4833
b) .6427
c) .5629
ii.
Rovin finds out that the beta of Threadless is:
a) 1.2211
b) 1.0371
c) 1.1481

Question 22
A firm has debt with a book value of £40 million and equity with a book value of £10 million.
In past earnings conference calls, the firm's management has indicated that the long-term
goal is to have a capital structure comprised of 25 percent debt and 75 percent equity. An
analyst is planning to calculate the firm's WACC to use in security valuation and has
determined that the market values of the firm's debt and equity are £50 million and £100
million, respectively. In calculating the WACC, the debt and equity weights the analyst
should use are closest to:
a) 25 and 75 percent, respectively.
b) 33 and 67 percent, respectively.
c) 80 and 20 percent, respectively.

Question 23
Southeast Inc.'s existing operations have a beta of 0.9, and its cost of capital is 14%. The
risk-free rate is 6%. It is considering investing in a new project that has a beta of 1.4. The
company's assets would then be split between 75% in the original business and 25% in the
new project. The company will remain debt free. If the new project does not alter the
valuation of the company, the new cost of capital for the company is closest to:
a) 15.1%.
b) 16.2%.
c) 18.5%.

Question 24
The pure-play method of determining the beta of a firm involves using the:
a) Equity beta of a company with the same debt-to-equity ratio and adjusting it for the
differences in the operating risk.
b) Asset beta of a company with the same systematic risk and adjusting it for the
changes in the debt-to-equity ratio.
c) Asset beta of a company with the same sales and business volatility and adjusting it
for the changes in the capital structure.

Question 25
Which of the following statements are true?

• Statement 1: The weights given to each component cost of capital is


based on the desired composition of sources of capital that will
support the investment.
• Statement 2: Equal weights are given to each component cost of
capital if the desired capital structure is not provided.


a) Statement 1 only

b) Statement 2 only
c) None of the above

Question 26
BobProds, an extremely large Internet retailer of products ranging from books to electronics
to household products, is considering expanding. The expansion project under consideration
would entail opening office supply stores in locations near the company's existing
distribution warehouses. These stores would benefit from the BobProds' buying power, as
the company already buys large quantities of offices supplies that it sells online. Given this
buying power, the new stores will be able to undercut prices charged at other stores. The
project (the new stores) will be funded with debt and equity that exactly matches the
company's existing levels, which also match the company's target level. Relative to
BobProds' WACC, the WACC used to discount the cash flows for the expansion project into
office supply stores will most likely:
a) differ because a startup business, even one having the same leverage as BobProds,
is always riskier.
b) differ because the asset beta for general internet retailing will likely differ from the
asset beta for office supply stores.
c) be the same because the financing is the same for the startup and the startup is
selling products that company already sells.

Question 27
Political instability in a country is widely perceived as a systematic risk. Political instability
will most likely be seen as an unsystematic risk for U.S.-based companies if:
a) there is a political instability in the United States.
b) there is political coup in one of the countries in the Middle East and the United
States depends on the Middle East for 90% of its energy requirements.
c) they have business units operating in the Middle East, when there is a political coup
in the Middle East.

Question 28
The rate of return required by owners of a company's common stock is equal to the:
a) cost of equity.
b) expected market return.
c) weighted average cost of capital.

Question 29
Consider the following statements about the dividend discount model (DDM).

I. The DDM gives an incorrect estimate of the cost of equity when the
intrinsic value of the stock is not equal to the current price of the
stock.
II. The DDM cannot estimate the value of the stock when the retention
rate retained earnings are more than the payout rate.

Which of the following is true?


a) I only.
b) II only.
c) Both I and II.
Question 30
Nancy Mines currently has a marginal tax rate of 40 percent and it has the following debt
and equity outstanding:

• $100 million in face value debt issued 10 years ago and 10 years
remaining to maturity. These bonds pay a 9 percent coupon with
semiannual payments. When issued, the company received proceeds
of $110 million and in the market today the bond issue has a value of
$130 million.
• 20 million common shares are outstanding with a par value of $0.50
per share. Currently, the shares have a market price of $13 each and
the stock beta is 1.6.

Nancy Mines, in order to buy property for a new mine, needs to raise $20 million. The
company has determined that it can issue $5 million in new debt at par if the bonds yield an
amount equal to yield-to-maturity for its preexisting debt. If more debt than $5 million is
issued, then the yield required on the entire issue will be 10 percent.
Investment bankers for the Nancy Mines have told the company that it can issue up to $30
million in new common stock at a price of $13 per share. The current risk-free rate is 2.0
percent and the expected return on the market is 9.0 percent.
If Nancy Mines maintains the same debt-to-equity ratio while raising the $20 million, its
weighted average cost of capital is closest to:
a) 9 percent.
b) 10 percent.
c) 11 percent

Question 31
Alton Technologies is planning to set up a new plant in a foreign country. The company has
the following capital structure:
Capital Structure Required Rate of Return
45% common stock 8%
35% debt 7%
20% preferred stock 9%
The company’s directors have estimated the cost of the investment to be $55 million and
plan to finance $33 million by issuing common stock and $22 million by issuing debt. Given
that the company’s marginal tax rate is 40%, its weighted average cost of capital is closest
to:
a) 20.10%
b) 7.60%
c) 6.48%

Question 32
An analyst gathered the following information regarding MT Technologies:
Current market share price = $42
Current dividend = $1.02 per share
Earnings retention rate = 70%
Return on equity = 22%
After-tax cost of debt = 9%
Marginal tax rate = 35%
Target debt-to-equity ratio = 0.3
The company’s weighted average cost of capital is closest to:
a) 16.08%
b) 15.35%
c) 15.44%

Question 33
An analyst gathered the following information regarding Moon Traders:
Current market share price = $55
Risk-free rate = 6%
Current market risk premium = 7%
Beta of stock = 1.4
Target debt-to-equity ratio = 0.4
The company has a capital structure that includes BB-rated bonds with five years to
maturity. The yield-to-maturity on a comparable BB-rated bond with a similar term to
maturity is 8%. Given that the company’s marginal tax rate is 40%, its weighted average cost
of capital is closest to:
a) 12.66%
b) 13.57%
c) 11.40%

Question 34
What is the cost of preferred stock if the price is $49/share, the dividend is $2.30, and the
risk-free rate is 4%?
a) Less than 4%.
b) More than 5%.
c) Between 4% and 5%.

Question 35
Calcite Development Corporation is a small corporation that has about 35,000 shareholders,
each holding an average of seven shares each. The shares are selling for $12.30. The
company's return on equity is stable at around 4.5%. Net income of Calcite was expected to
be $1,100,000. It also pays out 20% of its net income to its shareholders. As the company's
analyst, you are asked to determine the cost of equity. What is Calcite's cost of equity?
a) 8.48%
b) 10.90%
c) 9.77%
Question 36
Given the following information from two similar companies, answer the following
questions:
Fabien Avi
Cost of Debt 8% 9.5%
Cost of Equity 10% 12%
Tax Rate 32% 40%
Debt (Book Value) 320,000.00 400,000.00
Equity (Book Value) 780,000.00 680,000.00
Fabien Distillers Inc. aims to maintain a debt-to-equity ratio of 4:6. Avi, on the other hand,
desires a capital structure with a debt-to-equity ratio of 3:7.
i.
Determine Fabien's WACC.
a) 7.8%
b) 8.2%
c) 8.6%
ii.
Determine Avi's WACC.
a) 10.11%
b) 8.71%
c) 6.21%
iii.
Suppose the two companies don't have a desired capital structure, and the market values of
the equity of the two companies are 1.7 times its book value. Fabien's debt is quoted at
$375,000 and Avi's debt is quoted at $425,000. If the desired capital structure is not
provided but the market values are provided, how much greater will Avi's WACC be than
Fabien's?
a) 1.49%
b) 1.36%
c) 1.31%

Question 37
The beta of ABC's common stock is 1.1, the dividend paid is $3.50, and the stock price is
$82.00. The expected market return is 12% and the risk-free rate is 6%. The cost of equity is
closest to:
a) 6.6%.
b) 12.6%.
c) 13.2%.
Question 38
Jones-Day Corporation's equity beta recently fell, but in contrast, its asset beta is
unchanged. Which of the following best explains the equity beta decline combined with an
unchanged asset beta?
a) The company's tax rate declined.
b) The company's leverage decreased.
c) The outcome described cannot occur; a decline in an equity beta is always caused by
an asset beta decline.

Question 39
Which of the following is included in the computation of the WACC of an entity?
a) Dividend rate of preferred shares
b) Return on assets
c) Cost of borrowings (after taxes)

Question 40
The country risk premium (CRP) is calculated as the:
a) Product of the sovereign yield spread and the ratio of the volatility of the sovereign
bond market denominated in terms of the currency of a developed country to the
volatility of the developing country's equity market.
b) Sum of the sovereign yield spread and the ratio of the volatility of the developing
country's equity market to the volatility of the sovereign bond market denominated
in terms of the currency of a developed country.
c) Product of the sovereign yield spread and the ratio of the volatility of the
developing country's equity market to the volatility of the sovereign bond market
denominated in terms of the currency of a developed country.

Question 41
An analyst gathered the following information about a company:
Stock price: $45
Last dividend: $5 per share
Dividend growth rate: 8%
Cost of debt: 9%
Tax rate: 35%
Target debt-to-equity ratio: 0.4
The firm’s WACC is closest to:
a) 14.34%
b) 15.96%
c) 16.86%

Question 42
Determine the cost of preferred equity of Cayman Inc.
35% Tax rate
$34.00 Par value of preferred shares
$5.10 Dividend per preferred share
$49.00 Current price of the preferred share
a) 15.00%
b) 6.77%
c) 10.41%

Question 43
Where is the optimal point of capital budgeting on the investment opportunity schedule
(IOS) as it relates to the marginal cost of capital (MCC)?
a) MCC is above the IOS.
b) MCC is at the IOS.
c) MCC is beneath the IOS.

Question 44
Jupiter Inc. is planning to invest $142,000 in a new project. The company’s directors have
been provided with the following information:
Expected future cash flows = $25,000 every year for the next six years
Before-tax cost of debt = 7.5%
Current market share price = $37.5
Expected market risk premium = 5%
Risk-free rate = 6%
Beta of the stock = 1.4
Target debt-to-equity ratio = 0.5
Marginal tax rate = 30%
Flotation costs for equity = 3.5%
The net present value of the project is closest to:
a) −$39,405
b) −$34,435
c) −$37,749

Question 45
A company has a target capital structure of 70% debt and 30% equity. If the company raises
equity of less than $10 million, then its cost of equity is 12%. If the new equity issued is
above $10 million, its cost of equity is 14%. The first break point in the cost of capital raised
due to the change in the cost of equity is closest to:
a) $10.00 million.
b) $14.29 million.
c) $33.33 million.
Question 46
Dagg Corporation is a medium-sized company, and Venso Corporation is a large player; both
companies operate in the same industry. The financials of the two companies are given
below. Based on this information, the weighted average cost of capital (WACC) of Dagg, as
compared to Venso, is most likely:
Dagg Venso
Equity (in $ millions) 40 87
Debt (in $ millions) 55 120
Marginal tax rates 45% 40%
Current yield 6.0% 6.8%
IRR of existing debt 8% 7.5%
Required rate of return on company's equity 11% 11%
a) higher because of a higher IRR on its debt.
b) higher because of a lower current yield on its debt.
c) lower because of its higher marginal tax rate.

Question 47
A comparable firm's asset beta:
a) Is a comparable firm's beta that is levered.
b) Is multiplied by 1 plus the post-tax debt-to-equity ratio to arrive at a project's beta.
c) None of the above.

Question 48
Which of the following is the least likely reason for an increase in the marginal cost of capital
of a company?
a) A deviation in the target capital structure due to the repurchase of shares.
b) An issue of callable bonds.
c) An issue of subordinated bonds.

Question 49
Maxwell Electronics, a consumer electronics company, plans to expand its operations in the
Asia-Pacific region. The company has debt of $4 million and assets worth $14 million.
Cuprum Electricals Inc., the market leader, has similar revenue, net income, and business
risk. The information of the two companies is as follows:
Debt of Cuprum Electricals Inc. $7 million
Equity of Cuprum Electricals Inc. $35 million
Levered beta of Cuprum Electricals Inc. 0.8
Marginal tax rate 40%
Risk-free rate 5%
Market risk premium 10%
Based on the information provided, calculate the cost of equity of Maxwell Electronics.
a) 10.76%.
b) 13.37%.
c) 13.86%.

Question 50
The current debt-to-equity ratio of Crimson Corporation is 2.5. The company has failed to
give a comprehensive estimate of its target capital structure. The other financial details of
the company are as follows:
Book value of debt $250,000
Book value of equity $100,000
Market value of debt $350,000
Market value of equity $400,000
Current yield of debt 6%
Yield to maturity of debt 7.50%
Effective tax rate 30%
Marginal tax rate 35%
Equity risk premium 4.50%
The risk premium for bearing additional risk associated with the company's stock compared
to that of bonds is 3.5%. The company's weighted average cost of capital (WACC) is closest
to:
a) 6.63%.
b) 7.69%.
c) 8.14%.

Question 51
Satchels Corp. is a medium-size company that expects growth of 6% annually, a confidence
based on its stellar performance for the past few years and the opportunities in the coming
year. Its shares are priced at $27, and the board recently approved the increase of its
dividends by 15%. The dividends prior to the increase were $4 per share. What is the cost of
equity?
a) 23.04%
b) 17.04%
c) 16.07%

Question 52
Consider the following information for Jasmine Inc.:

• Beta, Jasmine Inc.: 1.39


• Risk-free rate: 7%
• Return on market portfolio: 18%
• Company tax rate: 40%
What is the cost of the common equity of Jasmine Inc.?
a) 32.02%
b) 19.49%
c) 22.29%

Question 53
An analyst has gathered the following information on a company and the market:
Current market price of company's common shares $10.20
Common stock dividend yield, based on most recent dividend paid 2.45 percent
Expected dividend payout rate 20 percent
Expected return on equity (ROE) 15 percent
Beta for company's common stock 1.4
Asset beta for company's industry 0.9
Expected rate of return for the market portfolio 10 percent
Risk-free rate of return 4 percent
Using the capital asset pricing model (CAPM) approach, the cost of equity is closest to:
a) 9.4 percent.
b) 12.4 percent.
c) 18.0 percent.

Question 54
A stock of Celadon, currently priced at $20, pays about 28% of its net income as dividends to
its 78,000 shareholders. The shareholders hold an average of three shares each, and they
require a 14.63% return on the stock. Celadon's analyst reports that its net income is
projected to be $1.67 million. The return on equity of Celadon is:
a) 6.44%.
b) 5.81%.
c) 5.49%.

Question 55
The current debt-to-equity ratio of Lonarde Corporation is 1.2. It has a target debt-to-equity
ratio of 0.8. Its cost of equity is 6% up to $120,000 in total equity, after which the weighted
average cost of capital (WACC) will increase. The corresponding break point in Lonarde's
marginal cost of capital schedule is closest to:
a) $216,000.
b) $264,000.
c) $270,000.

Question 56
An analyst has gathered the following information on a private company and its publicly
traded competitor:
Market Value Equity in Market Value Debt in Equity Tax Rate
Millions ($) Millions ($) Beta (%)
Private 100 150 N.A. 20.0
company
Public 900 600 1.30 25.0
company
Using the pure-play method, the estimated equity beta for the private company is closest to:
a) 1.5.
b) 1.7.
c) 1.9.

Question 57
An analyst gathered the following information regarding Star Traders Inc.:
Current market share price = $42
Market price of preferred stock = $52
Common stock (issued 300,000 common shares) = $3,000,000
Preferred stock (issued 40,000 preferred shares) = $800,000
The company pays dividends of $3.40 per share and $5.60 per share on its common and
preferred stock respectively. The company’s cost of preferred stock is closest to:
a) 9.48%
b) 10.77%
c) 11.63%

Question 58
An analyst makes the following two statements:

1. “Because the profit from investing in a new project adds to a


company's preexisting income before taxes and this additional pretax
income will be taxed at the company's marginal tax rate, the marginal
tax rate is the appropriate tax rate to use in the adjustment of the
before-tax cost of debt in determining the after-tax cost of debt.”
2. “For a given company, the intersection of the investment opportunity
schedule and the marginal cost of capital schedule is the point where
the company's weighted average cost of capital is minimized.”

With respect to these two statements, the analyst is most likely correct in making:
a) statement 1 only.
b) both statements 1 and 2.
c) neither statement 1 nor 2.

Question 59
An analyst is using both the yield-to-maturity (YTM) and the debt-rating approach to
estimate Yaz Corporation's pretax cost of debt. Five years ago, Yaz issued 10-year $1,000 par
debt that has a 3.0 percent coupon, and the coupon interest is paid semiannually. This debt
is currently rated AAA. In the bond market, Yaz's debt is trading at $980. The analyst has
gathered the following information on corporate debt yields:
Rating Yield for 5-Year Maturity Yield for 10-Year Maturity
AAA 3.0 percent 4.2 percent
AA 3.2 percent 4.7 percent
A 3.5 percent 5.3 percent
In comparing the two approaches, the analyst will most likely conclude that the estimated
pretax cost of debt using the debt-rating approach is:
a) equal to the estimate using the YTM approach.
b) lower than the estimate using the YTM approach.
c) higher than the estimate using the YTM approach.

Question 60
Alem Retail Inc. issues noncallable, nonconvertible preferred stock that pays a dividend of
$7 per share. The company is expected to grow at a constant growth rate of 8%, and its
preferred shares are traded at $160. The company's cost of preferred stock is closest to:
a) 4.05%.
b) 4.38%.
c) 4.73%.

Question 61
An analyst gathered the following information about a company:
Risk-free rate: 8%
Equity market risk premium: 6%
Firm’s beta: 1.2
Cost of debt: 10%
Tax rate: 30%
Assuming a target debt-to-equity ratio of 0.3, calculate the firm’s WACC.
a) 13.31%
b) 14%
c) 12.74%

Question 62
A business should stop raising any more capital to invest in new projects when the
investment opportunity curve crosses:
a) The current yield curve.
b) The total cost of capital curve.
c) The marginal cost of capital curve.
Question 63
North Company has a common stock price of $72. The latest reported earnings per share
were $4.80 and dividends per share were $1.60. The return on equity (ROE) is 8%. The cost
of equity is closest to:
a) 7.46%.
b) 7.55%.
c) 7.67%.

Question 64
Command, Ltd, a computer maker, is starting a new product line to make smartphones. The
company will finance this expansion with 80 percent debt and 20 percent equity. Jason
Moore, an analyst covering the technology sector, is estimating the value of this new
product to Command and how it will affect the price of Command's common shares. He has
noted that Command's current debt-to-equity ratio is 1.0 and that this ratio changes to 1.3
once the new project is funded. Moore has found four smartphone companies that are
comparable to Command's new product line and determined the equity and asset betas for
each. When converting the average asset beta for the comparables into a project beta,
Moore should use a debt-to-equity ratio that is closest to:
a) 1.0
b) 1.3
c) 4.0

Question 65
Which of the following best describes the optimal capital budget?
a) The optimal capital budget is the amount of capital that allows the company to take
all projects available.
b) The optimal capital budget is the optimal amount of capital that can maximize overall
shareholder value.
c) The optimal capital budget is not relevant in choosing which combination of projects
needs to be taken.

Question 66
Which of the following statements are true?

• Statement 1: One of the reasons cost of capital changes as new


capital is raised is the existence of covenants that restrict incurrence
of debt with similar seniority to that of the existing debt.
• Statement 2: Flotation costs cause the issuance of new sources of
capital to be more expensive.


a) Statement 1 only

b) Statement 2 only
c) All of the above

Question 67
An analyst using the CAPM to estimate a company's cost of equity has gathered the
following information:

• Risk-free rate = 3.5 percent


• Expected return on the market = 8.0 percent
• Company's common stock beta = 0.8
• Marginal tax rate for the company = 30 percent

The analyst's estimate of the cost of equity will be closest to:


a) 5.0 percent.
b) 7.1 percent.
c) 9.9 percent.

Question 68
Use this data from Ytterby Energies Corp. to determine the project's beta in Japan:
Expected market return 15%
Risk-free rate 5.4%
Country risk premium 3.35%
Cost of equity for the project 16.27
What is the project beta?
a) 0.84
b) 0.97
c) 0.75

Question 69
Which of the following statements about the marginal cost of capital schedule is correct?
a) Marginal cost of capital increases at a constant rate between any two break points.
b) A company having a single financing source will have one break point on the
marginal cost of capital schedule.
c) The marginal cost of capital schedule is typically an upward-sloping step-up cost
schedule.

Question 70
F&G, S.A. has a current capital structure that is 20 percent debt and 80 percent equity and
its cost of debt and equity are 6.2 and 8.0 percent, respectively. The company's marginal tax
rate is 30 percent and its equity beta is 0.9.
A new project being considered by F&G, S.A. will be funded with €40 million of debt and €60
million of equity. The new project is in a totally new business for F&G, but it will be taxed at
the same rate that F&G already pays. An internal analyst at F&G has found one company
that is comparable to the new project. This comparable has an equity beta of 1.8, debt of
€100 million, equity of €50 million, and a marginal tax rate of 20 percent. The beta used to
calculate F&G's equity cost associated with the new project will be closest to:
a) 0.8
b) 0.9
c) 1.0

Question 71
When using the dividend discount model, what happens to the formula's usefulness when
dividend growth rates exceed the firm's cost of capital?
a) DDM becomes more useful.
b) DDM becomes less useful.
c) There is no difference in DDM usefulness.

Question 72
A project with no IRR most likely may have:
a) an IRR of the project equal to zero.
b) a positive NPV for all discount rates.
c) an indeterminate NPV.

Question 73
Helena, Inc. is considering an entirely new line of business. The company has investigated
the business by identifying comparable companies. The data for these comparables is
below:
Market Value Market Value Tax
Sales in Equity in Millions Debt in Millions Equity Rate Share
Comparable Millions ($) ($) ($) Beta (%) Price ($)
Comp A 258 1,300 1,045 ??? 18.0 32.50
Comp B 635 4,254 1,263 1.15 22.0 12.28
If the asset beta for Comp A is 0.78, then the weighted average asset beta (based on equity
market values) for the pure players in the new line of business is closest to:
a) 0.90
b) 0.95
c) 1.00

Question 74
The yield-to-maturity on Capital One’s long-term debt is 8%. The risk premium is estimated
to be 5.5%. Given that the company’s marginal tax rate is 40%, its cost of equity and debt
are closest to:
Cost of Equity Cost of Debt
A 10.3% 8.0%
B 13.5% 4.8%
Cost of Equity Cost of Debt
C 10.3% 4.8%
a) Row A
b) Row B
c) Row C

Question 75
Mega Associates wants to invest in a project in Elantica, an emerging country. It gathered
the following information:

• Yield on Elantica’s dollar-denominated 10-year government bond =


12%
• Yield on a 10-year U.S. Treasury bond = 3.5%
• Annualized standard deviation of Elantica’s stock market = 34%
• Annualized standard deviation of Elantica’s dollar-denominated 10-
year government bond = 25%
• Project’s beta = 1.3
• Expected return on the Elantican equity market = 11%
• Risk-free rate = 6%

The country risk premium and cost of equity for the project in Elantica are closest to:
Country Risk Premium Cost of Equity
A 11.56% 27.53%
B 11.56% 24.06%
C 16.32% 28.82%
a) Row A
b) Row B
c) Row C

Question 76
Which of the following statements is most accurate?
a) Dividend payments provide a tax shield and, therefore, should be adjusted for tax
savings in the WACC formula.
b) A company’s marginal cost of capital increases as it raises additional capital.
c) The profitability of the company’s investment opportunities increases as the company
makes additional investments.

Question 77
An analyst gathered the following information about a company:
Capital Structure Required Rate of Return
25% debt 12%
35% preferred stock 14%
Capital Structure Required Rate of Return
40% common stock 17%
Assuming a tax rate of 30%, the company’s cost of capital is closest to:
a) 14.7%
b) 13.8%
c) 12.6%

Question 78
Which of the following is least likely to be true?
a) For a company having the same preferred share yield and common stock yield, the
cost of preferred stock is equal to the cost of common stock when the growth rate
of the equity dividend is zero.
b) An issue of new preferred stock increases the financial leverage of a company, but
the marginal cost of equity is not affected by a new issue of preferred stock.
c) Accumulated dividend on cumulative preference shares does not affect the working
capital, but accrued dividend on the common stock decreases the working capital.

Question 79
Halogen Inc.'s analyst knows that its cost of equity is 19.74%. A default-free bond
instrument in Halogen's country has a yield of 3.5%. The market has an expected return of
9.46%. Based on this information, the analyst concludes that the beta of the company is
closest to:
a) 2.72.
b) 2.94.
c) 4.64.

Question 80
Which of the following statements is false?

• Statement 1: Small-capitalization stocks have generally greater risks


and return than large-capitalization stocks in the long run.
• Statement 2: Pure-play is the method of estimating the beta of a
company that is not publicly traded by using the beta of a
comparable company directly.


a) Statement 1 only

b) Statement 2 only
c) None of the above
Question 81
Chango, Inc. is considering an entirely new line of business. The company has investigated
the business by identifying comparable companies. The data for these comparables is
below:
Market Value Market Value Tax
Sales in Equity in Millions Debt in Millions Equity Rate Share
Comparable Millions ($) ($) ($) Beta (%) Price ($)
Comp A 258 1,300 1,045 ??? 18.0 32.50
Comp B 635 3,254 1,263 1.45 22.0 12.28
If the asset beta for Comp A is 0.65, then Comp A's equity beta is closest to:
a) 0.90
b) 1.10
c) 1.45

Question 82
Jason Corporation has the following capital structure:
Equity = 65%
Debt = 25%
Preferred stock = 10%
The company’s before-tax cost of debt is 10%, cost of common equity is 12%, and cost of
preferred equity is 13%. Given that the company’s marginal tax rate is 35%, its weighted
average cost of capital is closest to:
a) 12.48%
b) 11.60%
c) 10.73%

Question 83
A company has a target capital structure of 20 percent debt and 80 percent equity. The
company has determined the following with respect to raising capital:
Costs of Debt and Equity Schedule
Amount of New Debt (in After-Tax Cost of Amount of New Equity (in Cost of
millions) Debt millions) Equity
new debt < $10 4.0 percent new equity < $40 8.0
percent
$10 < new debt < $25 5.0 percent $40 < new equity < $80 10.0
percent
$25 < new debt 5.5 percent $80 < new equity 11.0
percent
The third debt break point is closest to:
a) $50 million in new debt capital being raised.
b) $125 million in new debt capital being raised.
c) $125 million in new total capital being raised.

Question 84
A company is considering a project that has an asset beta of 0.76. The company's debt-to-
capital ratio is 50 percent and the project itself will be financed with 75 percent debt. If the
company's and project's marginal tax rate is 32 percent, the estimated beta for the project
is closest to:
a) 1.2
b) 1.5
c) 2.3

Question 85
Alan DeVito, CFA, estimates the required rate of return on the equity of Pianco Corporation.
The information of the company is as follows:
Total no. of equity shares 1,000,000
Common stock $5,000,000
Earnings yield 8%
Net income $2,000,000
Retained earnings $6,500,000
Payout ratio 50%
Beta 0.8
IRR of the outstanding debt 9%
Current yield of the most recently issued debt 8%
Marginal tax rate 30%
Expected market returns 13%
Treasury bills yield 3%
Based on the information provided, the cost of equity using the Gordon growth model
(GGM) and the capital asset pricing model (CAPM) is closest to:
Gordon Growth model CAPM
A. 11% 8.7%
B. 11% 13.04%
C. 13.04% 11%
a) Row A
b) Row B
c) Row C

Question 86
Stanley Wills, CFA, wants to determine the cost of debt of DB-Locke Co. The firm's debt is
not publicly traded, so Stanley uses the debt rating of a comparable bond with a maturity
close to that of DB-Locke's debt. Stanley is using the:
a) Substitution approach.
b) Evaluated pricing approach.
c) Discount pricing.

Question 87
In calculating the cost of preferred stock:
a) The after-tax cost should be used, since the preferred dividends are paid from pretax
profits.
b) The cost should be adjusted for flotation costs, since it is the cost of issuing new
preferred stock in the current market.
c) If the stock has no maturity date, we can apply a perpetuity formula to find the
discount factor, which is the cost of the preferred stock.

Question 88
Fruitobest Foods Inc. currently trades at $525 per share. It recently paid a dividend of $2.45,
which is expected to grow at a constant rate of 6%. The company's cost of debt is equal to
8% and the risk-free rate is 4%. Calculate its cost of equity.
a) 6.42%
b) 6.47%
c) 6.49%

Question 89
A company has a target capital structure of 30% debt and 70% equity. If the company raises
debt of less than $1 million, then its after-tax cost of debt is 3%. If the new debt issued is
above $1 million, its after-tax cost of debt is 3.5%. The first break point in the cost of capital
raised due to the change in the cost of debt is closest to:
a) $1.00 million.
b) $3.00 million.
c) $3.33 million.

Question 90
Which of the following statements is most likely true of capital budgeting methods?
a) A change in the risk-free rate influences the result of the IRR method and the
profitability index.
b) The payback method ignores the time value of money, whereas profitability index
considers the time value of money.
c) The payback period takes into account outflows other than the initial outflow, but
the profitability index takes into account only the initial outflow.

Question 91
An analyst at Highland Industrials is investigating a project in a developing country. She has
estimated that the sovereign yield spread for the developing country is 5.2 percent and that
the equity risk premium for a project in the developing country is 6.8 percent. The analyst is
now calculating the cost of equity for the project using the CAPM and she observes that the
risk-free rate is 3 percent and the expected return on the market is 8 percent in the
developed country where Highland is based. If the appropriate beta is 1.4, the project's cost
of equity is closest to:
a) 9.5 percent.
b) 19.5 percent.
c) 23.7 percent.

Question 92
An analyst is calculating the WACC for Lil-Up, Inc. The company uses both debt and equity
capital in financing itself. The analyst has determined that Lil-Up's debt has a pretax cost of
10 percent and its equity has an estimated cost of 20 percent. The company's most recent
financial statements show that it pays an average tax rate of 24 percent and a marginal tax
rate of 40 percent. Based on market values, the analyst has also determined that Lil-Up's
debt-to-equity ratio is 60 percent. The WACC the analyst will calculate will be closest to:
a) 12 percent.
b) 13 percent.
c) 15 percent.

Question 93
Which of the following is most likely to cause a reduction in the firm’s WACC?
a) An increase in the market risk premium
b) A decrease in the firm’s tax rate
c) A decrease in the company’s equity beta

Question 94
Prime Systems Inc. has a substantial amount of its capital in the form of debt. The
accounting estimates adopted by Prime Systems often give rise to temporary differences
between the taxes payable and the income tax expense, resulting in deferred tax assets or
deferred tax liabilities being reported on its balance sheet. The company anticipates an
income tax rate cut and evaluates the effects. All else being equal, which of the following is
the most likely consequence of this change?
a) A decrease in the deferred tax liability and a decrease in the overall cost of debt.
b) An increase in the deferred tax asset and an increase in the overall cost of debt.
c) A decrease in the deferred tax asset and an increase in the overall cost of debt.

Question 95
Last year, a company issued $50 million of debt that was entirely bought by a private
investor. This debt, which was issued at par and is not traded, has a nine-year remaining life
and pays 8.0 percent interest on a semiannual basis. If the company were to issue $10
million in new debt today at par value, it would have to pay a coupon of 12.0 percent. The
company's equity has an estimated market value of $5 million and the estimated cost of
equity capital is 20 percent. The company has no additional debt or equity outstanding and
is currently, and for the foreseeable future, paying no taxes due to past and expected future
losses. In determining the company's weighted average cost of capital, the appropriate
after-tax cost of debt is closest to:
a) 8.7 percent.
b) 12.0 percent.
c) 13.0 percent.

Question 96
Zenuess Corporation is planning to issue 15-year, $1,000 face (par) value bonds with a 7
percent coupon paid semiannually. These bonds are expected to sell for $1,100 each and
the company's after-tax cost of debt will be 4.2 percent. The marginal tax rate for Zenuess is
closest to:
a) 30 percent.
b) 35 percent.
c) 40 percent.

Question 97
Sun Corporation has the following capital structure:
Equity = 50%
Debt = 45%
Preferred stock = 5%
The company’s after-tax cost of debt is 14% and the cost of equity is 16%. Given that the
company’s weighted average cost of capital is 14.5%, its cost of preferred equity is closest
to:
a) 4.5%
b) 3.5%
c) 4.0%

Question 98
An analyst is determining the cost of debt for an unrated company. The analyst estimated
the company's rating and then used this rating to assess the spread for credit default risk on
the company's bonds. The approach the analyst used is most likely the:
a) bond rating approach.
b) bond spread approach.
c) yield-to-maturity approach.

Question 99
Donald Investments has a target debt-to-equity ratio of 0.8. Given that the after-tax cost of
debt is 5.6% and that the company’s weighted average cost of capital is 10.8%, its cost of
equity is closest to:
a) 14.96%
b) 31.60%
c) 4.62%

Question 100
The WACC of Fiber Link Co. is 9.35%. Its tax rate is 32% and has a desired capital structure is
35-25-40 for debt, preferred equity, and common equity. What is the pretax cost of debt if
the cost of the equity are 6.5% (preferred) and 11% (common) before tax is applied?
a) 15.41%
b) 16.81%
c) 13.97%

Question 101
Escrow House Co. has a desired capital structure of 20-30-50 (preferred shares, debt, and
ordinary shares, respectively). If the tax rate shifts from 38% to 30%, use the following
information to determine the impact on WACC of the company:

• Before-tax cost of preferred stock: 8%


• Before-tax cost of common stock: 14%
• Before-tax cost debt: 17%


a) No effect

b) Decrease of 0.408%
c) Increase of 0.408%

Question 102
A company is currently financed using debt and equity. The market value of debt is $25
million, and the market value of equity is $40 million. The company has recently announced
that it will reduce the proportion of debt financing so the debt-to-equity ratio is 45%. The
current after-tax cost of debt and equity are 8% and 12%, respectively. Using the current
capital structure and target capital structure, the company's costs of capital are closest to:
Current Target
A. 7.4% 10.2%
B. 10.5% 10.2%
C. 10.5% 10.8%
a) Row A
b) Row B
c) Row C

Question 103
Jones Industries issued fixed-rate perpetual preferred stock ten years ago. This preferred
stock was issued at $40 per share in a private offering and at the time of issuance, the yield
was 10 percent. If Jones issued the same preferred stock today, it would yield 6 percent.
Today's value per share for the originally-issued preferred shares is closest to:
a) $30
b) $50
c) $70

Question 104
An analyst at an airline is estimating the levered beta for a new project to expand into
intercity bus service—a whole new line of business. The airline has a current debt-to-equity
ratio of 1.8 and the beta for its common shares is 2.2. The company has decided to finance
the new bus operation using $100 million of debt and $100 million of equity.
The analyst could find only one comparable for the intercity bus business. This comparable
company had a debt-to-equity ratio of 1.2, its common share beta was 1.4, and it pays the
same tax rate as is expected for the airline's intercity bus service. The beta the analyst will
use in calculating the cost of equity for the new bus business will most likely be:
a) less than 1.4.
b) greater than or equal to 2.2.
c) greater than 1.4 and less than 2.2.

Question 105
Massie Corporation has a stable operating history since its inception 10 years ago. It trades
on all major stock markets. During the past three years, Massie has made several
acquisitions financed by newly issued bonds. Based solely on the given information, which
estimation period is best suited to estimate beta for Massie?
a) 3 years.
b) 7 years.
c) 10 years.

Question 106
ABC Corp. issued nonconvertible, noncallable preferred stock last year at an issue price of
$100; it pays a dividend of $5 per annum. The stock is now trading at $110. The company's
marginal tax rate is 40%. The required return on ABC Corp preferred stock is closest to:
a) 2.7%.
b) 3.0%.
c) 4.5%.

Question 107
Which of the following statements regarding a stock’s beta is least accurate?
a) It is believed to revert toward 1 over time.
b) It is calculated by regressing market returns against the company’s stock returns over
a given period.
c) Some experts argue that the betas of small companies should be adjusted upward to
reflect greater risk.

Question 108
A company issued fixed-rate perpetual preferred stock two years ago. The shares were
issued at a price of $50 and they currently trade at a price of $62 per share. If the company
were to issue preferred stock today, the yield would have to be 7.0 percent. The dividend on
the previously issued preferred shares is closest to:
a) $3.50
b) $3.92
c) $4.34

Question 109
Which of the following is least likely an issue in estimating the cost of debt?
a) The company’s currently outstanding bonds contain embedded options.
b) The company uses leases as a source of finance.
c) The company uses fixed-rate debt.

Question 110
A company's marginal tax rate is due to increase. The firm's weighted average cost of capital
(WACC) will most likely:
a) increase.
b) decrease.
c) remain the same.

Question 111
Beta Inc. wants to raise capital amounting to $550 million. It has a target debt-to-equity
ratio of 1.2. The following table illustrates the company’s marginal cost of capital schedule:
Amount of New Debt ($ After-Tax Cost of Amount of New Equity ($ Cost of
millions) Debt millions) Equity
0–100 3.5% 0–200 6.5%
100–250 4.5% 200–400 7.5%
250–450 5.5% 400–600 8.5%
The company’s weighted average cost of capital is closest to:
a) 6.41%
b) 5.86%
c) 13.4%

Question 112
Which of the following is least likely an assumption when using WACC as the discount rate
to evaluate a particular project?
a) The project will have a constant capital structure throughout its life.
b) The company’s market values of debt and equity are available.
c) The project under consideration is an average-risk project.

Question 113
An analyst covering Internet start-up companies has determined that the asset beta for the
sector is 1.80, the average equity beta is 2.40, and the average marginal tax rate is 15
percent. The industry average debt-to-equity ratio is closest to:
a) 0.40.
b) 0.50.
c) 0.70.

Question 114
South Corp.'s target capital structure is 50% debt, 10% preferred stock, and 40% common
equity. If the before-tax costs of debt, preferred stock, and common equity are 10%, 11%,
and 14%, respectively, and the marginal tax rate is 40%, the WACC is closest to:
a) 9.3%.
b) 9.7%.
c) 10.3%.

Question 115
An analyst gathered the following information regarding Alpha Associates:
Source of Capital Book Value ($ millions) Market Value ($ millions)
Common stock 37.5 52.8
Preferred stock 30 31.68
Bonds outstanding 7.5 11.52
Total capital 75 96
The company’s before-tax cost of debt and the cost of common equity are 9% and the cost
of preferred equity is 11%. Given that the company’s marginal tax rate is 30%, its weighted
average cost of capital is closest to:
a) 9.66%
b) 9.48%
c) 9.34%

Question 116
Amrito Corporation is under financial distress and raises debt because it has several projects
that are expected to generate profit in the future. When calculating its weighted average
cost of capital (WACC):
a) The appropriate cost of debt would be the tax-adjusted marginal cost of debt.
b) The tax adjustment should not be made to calculate at the cost of debt.
c) The cost of debt should be equal to the yield to maturity of the bonds.
Question 117
A company is considering a project in a developing country. An analyst has determined that
the asset and project betas are 0.82 and 1.36, respectively. The risk-free rates of interest in
the developed and developing countries are 2.3 percent and 6.3 percent, respectively. The
analyst has estimated a sovereign yield spread of 4.0 percent and a country (equity) risk
premium of 5.2 percent. The historical equity risk premium for the developed market has
been 4.1 percent and it has been 7.8 percent for the developing country. The analyst will
calculate a project cost of equity that is closest to:
a) 14.9 percent.
b) 16.9 percent.
c) 18.5 percent.

Question 118
ABC Corp. has a 6% 10-year bond outstanding, which is trading at a yield to maturity of 8%.
The company's marginal tax rate is 40%. The component cost of debt for ABC Corp. is closest
to:
a) 3.6%.
b) 4.8%.
c) 8.0%.

Question 119
It is recommended that flotation costs when a firm issues new equity are:
a) Ignored.
b) Incorporated in the calculation of a firm's cost of capital.
c) Treated as a cash outflow at the time of the issue of the new equity.

Question 120
Pluto Inc. issues a semiannual pay bond to finance a new project. The bond has a 20-year
term, a par value of $1,000, and offers a 7% coupon rate. Given that the bond is issued at
$984.50 and that the company’s marginal tax rate is 40%, the after-tax cost of debt is closest
to:
a) 3.57%
b) 4.29%
c) 7.15%

Question 121
In capital budgeting, flotation costs should most likely be:
a) incorporated into the cost of capital by increasing the cost of equity.
b) incorporated into the cost of the project by increasing the project's initial cash
outflow.
c) incorporated into the cost of capital by adding the percentage cost to the preexisting
WACC.

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