Cost of Capital: Test Code: R36 COCA Q-Bank

Cost of Capital
Test Code: R36 COCA Q-Bank

Number of questions: 59
Question Q-Code: L1-CF-COCA-001 LOS a Section 2
1 The following data is available for a company:

Cost of debt: 9%
Cost of equity: 12%
Debt-to-equity ratio (D/E): 100%
Tax rate: 30%
The weighted average cost of capital (WACC) is closest to:
A) 6.30%.
B) 9.00%.
C) 9.15%.
2 The following information is available for a firm:

Debt-to-equity ratio: 50%
Tax rate: 30%
Cost of debt: 12%
Cost of equity: 19%
The firm’s weighted average cost of capital (WACC) is closest to :
A) 14.45%.
B) 15.47%.
C) 16.33%.

Cost of debt: 11%
Cost of equity: 15%
Debt-to-equity ratio (D/E): 50%
Tax rate: 35%
The weighted average cost of capital (WACC) is closest to:
A) 10.82%.
B) 11.08%.
C) 12.39%.
4 A firm’s estimated costs of debt, preferred stock, and common stock are 13%, 17%, and 22%, respectively. Assuming equal funding
from each source and a 30% tax rate, the weighted average cost of capital is closest to:
A) 15.45%.
B) 16.03%.
C) 17.33%.
5 An analyst gathers the following information about the capital structure and before-tax component costs for a company. The
company’s marginal tax rate is 35 percent.
Capital Book Market Component

component Value(000) Value(000) cost
Debt € 120 € 100 6%
Preferred stock € 60 € 60 9%
Common stock € 300 € 240 13%
T he company’s weighted average cost is closest to:
A) 10.13%.
B) 9.55%.
C) 10.56%.
6 A.F. Company has a debt to equity ratio of 60% and is subject to taxation at a rate of 40%. Its cost of equity is 17% while its cost of debt
is 12.5%. A.F. Company’s weighted average cost of capital is closest to:
A) 11.3%.
B) 13.4%.
C) 14.3%.
7 Golden Giants has the following capital structure which is funded from common stock, preferred stock and debt.
Source Amount Cost
Common 100,000,000 16.0%

Stock
Preferred 2,000,000 14.5%

Stock
Debt 18,000,000 12.0%
Total 120,000,000
If the tax rate is 35%, the company’s weighted average cost of capital is closest to:
A) 14.2%.
B) 14.7%.
C) 15.4%.
8 Pamela Peterson computes the weighted average cost of capital (WACC) for the company Atom International. The information used for
computation is as follows:
Common equity has beta 1.2 while the risk free rate and market premium are 5% and 7% respectively.
The preferred stock has value of $48 with a dividend worth $6.
The corporate tax rate is 20%.
Bonds are issued at par and have a coupon rate of 11%.
Capital structure is 20% preferred stock, 35% debt and 45% common stock.
Atom International’s WACC is closest to:
A) 9.1%.
B) 11.6%.
C) 12.4%.
9 An analyst gathers the following data about a company to compute its weighted average cost of capital (WACC).
Before-tax cost of new debt 10 percent
Tax rate 35 percent
D/E 0.6660
Stock price $30
Next year’s dividend $2.50
Estimated growth rate 6.5 percent
Using the dividend discount model, the company’s WACC is closest to:
A) 11.50 percent.
B) 12.25 percent.
C) 13.00 percent.
10 Digital Design Corporation has an after-tax cost of debt capital of 7 percent, a cost of preferred stock of 9 percent, a cost of equity
capital of 11 percent, and a weighted average cost of capital of 8.5 percent. In raising additional capital, the company intends to
maintain its current capital structure. In order to make a capital - budgeting decision for an average risk project, the relevant cost of
capital is:
A) 7 percent.
B) 8.5 percent.
C) 11 percent.
Question Q-Code: L1-CF-COCA-011 LOS b Section 2
11 A firm with a marginal tax rate of 40% has a weighted average cost of capital of 7.11%. The before-tax cost of debt is 6%, and the
before-tax cost of equity is 9%. The weight of equity in the firm's capital structure is closest to:
A) 27%.
B) 65%.
C) 89%.
12 Which of the following statements is most likely true?
A) The investment opportunity schedule, for a given company, is upward sloping because as a company invests more in capital
projects, the returns from investing keep on increasing.
B) In order to determine the after-tax cost of debt, the appropriate tax rate to use is the average rate.
C) The after-tax debt cost, for a given company, is generally less than both the cost of preferred equity and the cost of common equity.
13 Which of the following components of WACC is affected by taxes?
A) Cost of equity.
B) Cost of debt.
C) Cost of preferred shares.
Question Q-Code: L1-CF-COCA-014 LOS c Section 2
14 Gaven Warren at California Investment Advisors wants to estimate the cost of capital for Semiactive Conductors as well as projected
cash flows for two of their projects to determine the effect of these new projects on the value of Semiactive Conductors. Warren has
gathered following information on Semiactive Conductors:
Current Target
($) ($)
Book Value of Debt 62 62
Market Value of 59 63
Debt
Book Value of 78 88
Shareholder’s
Equity
Market Value of 230 240

Shareholder’s
Equity
Weights that should be applied to estimating the cost of debt and equity capital for Semiactive Conductors respectively are:
A) wd = 0.262; we = 0.738.
B) wd = 0.208; we = 0.792.
C) wd = 0.413; we = 0.587.
Question Q-Code: L1-CF-COCA-015 LOS c Section 4
15 In collecting information to conduct financial analysis on Budweiser’s new product line of sparkling water, Simon Hayes found that
Budweiser currently has a debt-to-equity ratio of 0.55 and the new product line would be financed with $45 million of debt and $65
million of equity. Hayes has estimated the equity beta and asset beta of comparable companies to determine the valuation impact of
the new product line on Budweiser’s value. Which of the following statements for calculating the equity beta for this new line of product
is most accurate?
A) Using the new debt-to-equity ratio of Budweiser that would result from the additional $45 million debt and $65 million equity is
appropriate.
B) Using the current debt-to-equity ratio of 0.55 is appropriate.
C) Using the current debt-to-equity ratio of 0.55 is not appropriate, but the debt-to-equity ratio of the new product line i.e. 0.69 is
appropriate.
Question Q-Code: L1-CF-COCA-016 LOS d Section 2
16 An optimal capital budget occurs when the marginal cost of capital:
A) is below the investment opportunity schedule.

B) is above the project’s rate of return.
C) intersects the investment opportunity schedule.
Question Q-Code: L1-CF-COCA-017 LOS d Section 2
17 Analyst 1: A company’s optimal capital budget occurs at the intersection of the net present value and the internal rate of return profiles.
Analyst 2: A company’s optimal capital budget occurs at the intersection of the marginal cost of capital and the investment opportunity
schedule.
Which analyst’s statements is most likely correct?
A) Analyst 1.
B) Analyst 2.
C) Neither.
Question Q-Code: L1-CF-COCA-018 LOS e Section 2
18 Information about a company is provided below. It is expected that the company will fund its capital budget without issuing any
additional shares of common stock:
Source of capital Capital structure proportion Marginal after-tax cost
Long-term debt 30% 12%
Preferred stock 5% 15%
Common equity 65% 20%
Net present values of three independent projects:
Storage project: $348

Upgrade project: $0
Production line improvement project: -$231
If no significant size or timing differences exist among the projects and the projects all have the same risk as the company, which
project has an internal rate of return that exceeds 17.35 percent?
A) All three projects.

B) Storage project only.
C) Storage project and upgrade project.
Question Q-Code: L1-CF-COCA-019 LOS e Section 2
19 If we use the company’s marginal cost of capital in the calculation of the NPV of a project, we are least likely assuming that:
A) the project has the same risk as the average-risk project of the company.
B) no new projects will be undertaken until the current project is completed.
C) the project will have a constant target capital structure throughout its useful life.
Question Q-Code: L1-CF-COCA-020 LOS f Section 3
20 Which of the following is the least appropriate method for an external analyst to estimate a company’s cost of debt?
A) Yield-to-maturity approach.
B) Bond yield plus risk premium approach.
C) Debt rating approach.
21 If the debt rating approach is used to determine the cost of debt, then:
A) yield is based on the interest coverage ratio.

B) company is rated and the rating can be used to assess the credit default spread of the company’s debt.
C) coupon rate is the yield.
22 A company is considering issuing a 5-year option-free, 8 percent coupon bond, paid semi-annually. The bond is expected to sell at 98
percent of par value (USD1,000). If the company’s marginal tax rate is 35 percent, then the after-tax cost of debt is closest to:
A) 8.50%.
B) 5.53%.
C) 6.35%.
23 A company issued $20 million in long-term bonds at par value three years ago with a coupon rate of 10 percent. The company has
decided to issue an additional $20 million in bonds and expects the new issue to be priced at par value with a coupon rate of 8
percent. There is no other outstanding debt. The applicable tax rate is 35 percent. The appropriate after-tax cost of debt in order the
compute the weighted average cost of capital is closest to:
A) 5.2 percent.
B) 5.8 percent.
C) 6.1 percent.
24 ACME Minerals has determined that it could issue at $750 a seven-year maturity bond that pays 9.5% coupon semi-annually with a face
value of $1000. If the marginal tax rate applicable in the company is 30%, its after-tax cost of debt will most likely be:
A) 5.4 percent.
B) 10.8 percent.
C) 12.7 percent.
25 Which of the following statements describe matrix pricing most accurately? Matrix pricing:
A) is used to calculate the coupon rate of a bond.

B) helps to determine the equity risk premium in the market.
C) is used in pricing bonds through the debt-rating approach.
Question Q-Code: L1-CF-COCA-026 LOS g Section 3
26 A company’s $100 par value preferred stock with a dividend rate of 15.0% per year is currently priced at $105.85 per share. The
company's earnings are expected to grow at an annual rate of 3% for the foreseeable future. The cost of the company’s preferred
stock is closest to :
A) 12.9%.
B) 13.5%.
C) 14.2%.
27 RBS Insurance Limited issued to retail investors a fixed-rate perpetual preferred stock four years ago at par value of $10 per share with
a $2.85 dividend. If the company had issued the preferred stock today, the yield would be 8.5 percent. The current value of the stock
is:
A) $10.00.
B) $33.53.
C) $43.85.
28 MTI issued a noncallable, nonconvertible, fixed rate perpetual preferred stock five years ago. The stock was issued at $15 per share
with a $1.25 dividend. If the company were to issue preferred stock today, the yield would be 8.75 percent. The stock’s current value is
closest to:
A) $13.26.
B) $15.00.
C) $14.29.
Question Q-Code: L1-CF-COCA-029 LOS h Section 3
29 The cost of equity capital is equal to the:
A) rate of return required by stockholders.

B) cost of retained earnings minus dividend yield.
C) expected market return.
30 Using the dividend discount model, the cost of equity capital for a company which will pay a dividend of $2.00 next year, has a payout
ratio of 35 percent, a return on equity (ROE) of 15 percent, and current stock price of $40, is:
A) 10.51 percent.
B) 12.25 percent.
C) 14.75 percent.

Bonds are priced at par and they have an annual coupon rate of 10.3%
Preferred stock is priced at $15.80 and it pays an annual dividend of $2.2
Common equity has a beta of 1.1
The risk-free rate is 3% and the market premium is 12%
Capital structure: Debt = 35%; Preferred stock = 15%; Common equity = 50%
The tax rate is 40%
The weighted average cost of capital (WACC) for the company is closest to:
A) 11.40.
B) 12.35.
C) 13.33.
32 A company wants to determine the cost of equity to use in calculating its weighted average cost of capital. The controller has gathered
the following information:
Risk free rate: 2.4%
Market equity risk premium: 4.0%
The company’s estimated beta: 1.2
The company’s after-tax cost of debt: 7.0%
Risk premium of equity over debt: 3.0%
Corporate tax rate: 30%
Using the capital asset pricing model (CAPM) approach, the cost of equity (%) for the company is closest to:
A) 6.8.
B) 7.2.
C) 7.9.
33 An analyst gathers the following information about a company and the market:
Current market price per share of common stock $45.00
The next dividend that the company will $2.50

pay per share on common stock
Expected dividend payout rate 30%
Expected return on equity (ROE) 12%
Beta for common stock 1.2
Expected return on the market portfolio 9%
Risk free rate 3%
Using the dividend discount model approach, the cost of common equity for the company is closest to:
A) 10.20%.
B) 13.96%.
C) 12.50%.
34 An analyst has collected following information about a company and the market:
Current market price per share of $17.00

common stock
Latest dividend (D0) paid on $1.50

common stock
Beta 0.75
Expected rate of return on market 15%

portfolio
Risk-free rate of return 5.25%
According to the dividend discount model (DDM), the cost of retained earnings for the company is closest to:
A) 12.2 percent.
B) 11.9 percent.
C) 12.5 percent.
35 An analyst has collected following information about a company and the market:
Current market price per share of $17.00

common stock
Latest dividend (D0) paid on $1.50

common stock
Beta 0.75
Expected rate of return on market 15%

portfolio
Risk-free rate of return 5.25%
According to the Capital Asset Pricing Model (CAPM) approach, the cost of retained earnings for the company is closest to:
A) 12.6 percent.
B) 12.2 percent.
C) 13.2 percent.
Question Q-Code: L1-CF-COCA-036 LOS i Section 4
36 The average levered and average unlevered betas for the group of comparable companies of a private subcontractor of autoparts, are
1.5 and 1.01 respectively. The debt-equity ratio is 1.3 and corporate tax rate is 40%. The estimated beta for the private subcontractor
is closest to:
A) 1.978.
B) 1.698.
C) 1.798.
37 A company has an equity beta of 1.2 and is 70% funded with debt. Assuming a tax rate of 30%, the company’s asset beta is closest to:
A) 0.46.
B) 0.63.
C) 0.71.
38 A company has an equity beta of 1.4. If the tax rate is 40%, and debt-to-equity ratio is 0.5, the asset beta is closest to:
A) 1.08.
B) 1.4.
C) 1.96.
39 Kyushu Motors has historically maintained a long-term stable debt-to-equity ratio of 0.60. To finance expansion plans in Africa, recent
bank borrowing raised this ratio to 0.75. The most likely effect of this increased leverage on the asset beta and equity beta of the
company is that:
A) the asset beta will rise and the equity beta will also rise.
B) the asset beta will remain the same and the equity beta will rise.
C) the asset beta will decline and the equity beta will also decline.
40 Cyndi collects data related to a company called Dinah Ltd. The asset beta of the company equals 0.64 while the equity beta is 1.80.
Given that the tax rate is 40%, the percentage of capital funded by debt is closest to:
A) 30%.
B) 75%.
C) 80%.
41 Morgan Private Limited currently has 1.5 million common shares of stock outstanding and the stock has a beta of 1.5. It also has a $9
million face value of bonds that have seven years remaining to maturity and 8 percent coupon with semi-annual payments, and are
priced to yield 15.00 percent. If Morgan issues up to $2.0 million of new bonds, the bonds will be priced at par and have a yield of 15.00
percent; if it issues bonds beyond $2.0 million, the expected yield on the entire issuance will be 18 percent. Morgan has learned that it
can issue new common stock at $10 a share. The current risk-free rate of interest is 5 percent and the expected market return is 12
percent. Morgan’s marginal tax rate is 35 percent. If Morgan raises $7.5 million of new capital while maintaining the same debt-to-equity
ratio, its weighted average cost of capital is be closest to:
A) 10.2 percent.
B) 12.2 percent.
C) 14.4 percent.
42 David Burke, CFA, an investment banking analyst at Fundamental Analytics is working on initial public offering of a UK based small-cap
mobile phone software development company, TagHere. For the previous three years, the industry has grown at a rate of 26 percent
per year. The industry is dominated by large players, but comparable “pure-play” companies such as Galicia Ltd., Venus Inc., and ImPro
Software Pvt. Ltd. also exist. Although each of these companies has their shares of stock traded on the London Stock Exchange, each
one is domiciled in a different country. The debt ratio of the industry has risen slightly in recent years.
Company Sales in Market Market Equity Tax Rate Share

Millions Value Value Beta Price (£)
(£) Equity in Debt in
Millions (£) Millions
(£)
Galicia Ltd. 843 2,150 6.5 2.450 25 percent 15
Venus Inc. 211 910 13.0 4.123 25 percent 27
ImPro Software 752 4,315 0.0 1.514 25 percent 12

Burke uses the
Pvt. Ltd.
information from the
information
memorandum for TagHere’s initial offering. The company intends to issue 1 million new shares. While finalizing the price of the deal, it
was concluded that the offering price will be between £5 and £10. The current capital structure of TagHere consists of a £3.6 million
five-year non-callable bond issue and 2 million common shares. Other information is given below:
Currently outstanding £3.6 million five-year bonds, coupon of

bonds 10.5 percent, with a market value of
£3.234 million
Risk-free interest rate 4.35 percent
Estimated equity risk 5 percent

premium
The asset betas for Galicia Ltd., Venus Inc., and ImPro
Software Pvt. Ltd., respectively, are:
Tax Rate 25 percent
A) 2.44, 4.08 and 1.51.
B) 1.56, 2.76 and 4.77.
C) 2.44, 3.12 and 4.08.

(£)

Burke uses the
Pvt. Ltd.
information

£3.234 million

premium
The average asset beta for the pure players in this industry
Galicia Ltd., Venus Inc., and ImPro Software Pvt. Ltd., weighted
Tax Rate 25 percent
by market value of equity is closest to:
A) 1.19.
B) 2.10.
C) 2.26.

(£)

Burke uses the
Pvt. Ltd.
information

£3.234 million

premium
Using the CAPM model, the cost of equity capital for a
company in this industry with a debt-to-equity ratio of 0.03,
Tax Rate 25 percent
asset beta of 3.14 and a marginal tax rate of 25 percent is
closest to:
A) 22.41 percent.
B) 20.36 percent.
C) 20.40 percent.

(£)

Burke uses the
Pvt. Ltd.
information

£3.234 million

premium
The marginal cost of capital for TagHere, based on an average
asset beta of 3.14 for the industry and assuming that new
Tax Rate 25 percent
stock can be issued at £7 per share, is closest to:
A) 20.1 percent.
B) 20.3 percent.
C) 21.3 percent.
46 An analyst has collected following information about a private company and its publicly traded competitor:
Comparable Tax Rate (%) Debt/Equity Equity Beta

Companies
Private company 35.0 0.90 NA
Public company 30.0 0.70 1.15
Using the pure-play method, the estimated equity beta for the private company is closest to:
A) 2.221.
B) 3.221.
C) 1.223.
Question Q-Code: L1-CF-COCA-047 LOS j Section 4
47 A developing country’s equity premium least likely includes:
A) sovereign yield spread.

B) annualized standard deviation of the sovereign bond markets in terms of the developing country’s currency.
C) annualized standard deviation of the developing country’s equity index.
48 An analyst has gathered the following information about the capital markets in the U.S. and in Montila, a developing country.
Selected Market Information (%)
Yield on U.S. 10-year Treasury bond 6.5
Yield on Montila, 10-year government bond 12.5
Annualized standard deviation of Montila stock index 40.0
Annualized standard deviation of Montila dollar- 25.0

denominated government bond
Based on the analyst’s data, the estimated country equity premium for Montila is closest to:
A) 8.41%.
B) 9.60%.
C) 10.40%.
49 Shawn Miller, CFA, is a buy-side analyst for a foundation managing a global large-cap fund. He has hired the services of a
telecommunications industry expert, Phillipa Jenkens. Miller is analyzing one of the fund’s largest holdings, a mobile phone
manufacturer Satellite QS operating globally in 50 countries with historical global revenues of $12.4 billion. Recently, Satellite’s
management announced expansion plans for a greenfield investment in Indonesia. Miller is concerned about the implications of the
expansion plans on Satellite’s risk profile and is wondering whether he should issue a ‘sell’ recommendation on the fund holding.
Miller provides Jenkens with basic company information. Satellite’s global annual free cash flow to the firm is $700 million, which is
expected to level off at a 3.5 percent growth rate and earnings are $550 million. Miller estimates that Satellite’s after-tax free cash flows
to the firm on the Indonesia project for the next four years are $60 million, $64 million, $67.5 million and $70.4 million. The company
has just recently announced a dividend of $2.5 per share of stock. To keep the analysis simple, Miller asks Jenkens to ignore any
possible exchange rate fluctuations. For the first four years, the Indonesian plant is expected to serve Indonesian customers only.
Jenkens has been assigned to evaluate Satellite’s financing plans of $130 million with a $97.50 million public offering of 8-year debt in
the US and the remainder to be financed by means of equity offering.
Additional information:
Equity risk premium, US 3.20 percent
Risk-free rate of interest, US 1.50 percent
Industry debt-to-equity ratio 0.45
Market value of Satellite’s debt $750 million
Market value of Satellite’s equity $3.2 billion
Satellite’s equity beta 1.05
Satellite’s before-tax cost of debt 5.25 percent
Indonesia credit A2 country risk premium 4.58 percent
Corporate tax rate 35 percent
Interest payments each year Level
Satellite’s cost of equity capital for a typical project using the capital asset pricing model is closest to:
A) 2.94 percent.
B) 4.59 percent.
C) 4.86 percent.

The weighted average cost of capital of Satellite QS prior to investing in Indonesia is closest to:
A) 2.94 percent.
B) 4.59 percent.
C) 4.86 percent.
In estimating the project’s cost of capital, the estimated asset beta of Satellite QS prior to investing in Indonesia is closest to:
A) 0.911.
B) 0.915.
C) 1.302.
Miller wants to conduct sensitivity analysis for the effect of the new project on the company’s cost of capital. The estimated project
beta for Indonesia project if it is financed with 75% with debt and has the same asset risk as Satellite, is closest to:
A) 3.841.
B) 2.699.
C) 2.688.

The cost of equity capital for the Indonesia project considering that this project requires to capture the country risk premium, that
would form part of the sensitivity analysis that Miller wants to conduct for the effect of the new project on the company’s cost of capital,
is closest to:
A) 22.41 percent.
B) 23.17 percent.
C) 26.87 percent.
In the final presentation to the senior fund manager, Miller wants to discuss the sensitivity of the project’s NPV to the estimation of the
cost of equity. The Indonesia project’s NPV calculated without the country risk premium and with the country risk premium are,
respectively:
A) $95 million and $73 million.

B) $101 million and $85 million.
C) $101 million and $73 million.
Question Q-Code: L1-CF-COCA-055 LOS k Section 4
55 An analyst gathers the following information about the cost and availability of raising various amounts of new debt and equity capital for
a company:
Amount of new Cost of Cost of new Cost of

debt debt equity equity
(in millions) (After tax) (in millions)

≤$5.0 3% ≤$6.0 12%
>$5.0 5% >$6.0 14%
The company’s target capital structure is 65% equity and 35% debt. If the company raises $12.5 million in new financing, the marginal
cost of capital is closest to :
A) 9.8%.
B) 11%.
C) 10.15%.
Question Q-Code: L1-CF-COCA-056 LOS k Section 4
56 Which of the following is least likely a reason for why the marginal cost of capital of a company rises as additional funds are raised?
A) Debt covenants restrict the company from issuing senior debt and consequently it issues subordinate debt.
B) The company deviates from its target capital structure.
C) The company issues additional equity at a time when the cost of equity is significantly lower than historical levels; it also issues
additional debt to maintain the overall debt/equity ratio at an optimal level.
Question Q-Code: L1-CF-COCA-057 LOS l Section 4
57 Scott Harris, a financial planner for a manufacturing corporation, wants to account for the floatation costs in his capital budgeting. The
most appropriate treatment of floatation costs is to:
A) expense in the current period.

B) incorporate into the estimated cost of capital.
C) deduct as one of the project’s initial-period cash flows.
Question Q-Code: L1-CF-COCA-058 LOS l Section 4
58 Analyst 1: Using the adjustment for the flotation costs in the cost of capital may be useful if specific project financing cannot be
identified.
Analyst 2: By adjusting the cost of capital for the flotation costs, it is easier to demonstrate how costs of financing a company change
as a company exhausts internally generated equity (i.e., retained earnings) and switches to externally generated equity.
Which analyst’s statements is (are) most likely correct?
A) Analyst 1.
B) Analyst 2.
C) Both.
59 The following information is available for a firm in a developing country:
Risk-free rate 5%
Firm’s equity beta 0.9
Equity risk premium in a developed 2.5%

country
Developing country risk premium 4.0%
Sovereign yield spread 3%
The firm's cost of equity using the CAPM approach is closest to:
A) 10.85%.
B) 11.25%.
C) 12.50%.

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Cost of Capital

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Question Q-Code: L1-CF-COCA-001 LOS a Section 2

1 The following data is available for a company:

Question Q-Code: L1-CF-COCA-002 LOS a Section 2

2 The following information is available for a firm:

Question Q-Code: L1-CF-COCA-003 LOS a Section 2

3 The following information is available for a firm:

Question Q-Code: L1-CF-COCA-004 LOS a Section 2

Question Q-Code: L1-CF-COCA-005 LOS a Section 2

Capital Book Market Component

Debt € 120 € 100 6%

Common stock € 300 € 240 13%

​T he company’s weighted average cost is closest to:

Question Q-Code: L1-CF-COCA-006 LOS a Section 2

Question Q-Code: L1-CF-COCA-007 LOS a Section 2

Source Amount Cost

Common 100,000,000 16.0%

Preferred 2,000,000 14.5%

Debt 18,000,000 12.0%

Question Q-Code: L1-CF-COCA-008 LOS a Section 3

Atom International’s WACC is closest to:

Question Q-Code: L1-CF-COCA-009 LOS a Section 3

Before-tax cost of new debt 10 percent

Tax rate 35 percent

Stock price $30

Next year’s dividend $2.50

Estimated growth rate 6.5 percent

Question Q-Code: L1-CF-COCA-010 LOS a Section 2

Question Q-Code: L1-CF-COCA-011 LOS b Section 2

Question Q-Code: L1-CF-COCA-012 LOS b Section 2

12 Which of the following statements is most likely true?

Question Q-Code: L1-CF-COCA-013 LOS b Section 2

13 Which of the following components of WACC is affected by taxes?

Question Q-Code: L1-CF-COCA-014 LOS c Section 2

Book Value of Debt 62 62

Market Value of 230 240

Question Q-Code: L1-CF-COCA-015 LOS c Section 4

Question Q-Code: L1-CF-COCA-016 LOS d Section 2

16 An optimal capital budget occurs when the marginal cost of capital:

A) is below the investment opportunity schedule.

Question Q-Code: L1-CF-COCA-017 LOS d Section 2

Which analyst’s statements is most likely correct?

Question Q-Code: L1-CF-COCA-018 LOS e Section 2

Source of capital Capital structure proportion Marginal after-tax cost

Long-term debt 30% 12%

Preferred stock 5% 15%

Common equity 65% 20%

Net present values of three independent projects:

Storage project: $348

A) All three projects.

Question Q-Code: L1-CF-COCA-019 LOS e Section 2

Question Q-Code: L1-CF-COCA-020 LOS f Section 3

Question Q-Code: L1-CF-COCA-021 LOS f Section 3

A) yield is based on the interest coverage ratio.

Question Q-Code: L1-CF-COCA-022 LOS f Section 2

Question Q-Code: L1-CF-COCA-023 LOS f Section 2

Question Q-Code: L1-CF-COCA-024 LOS f Section 2

Question Q-Code: L1-CF-COCA-025 LOS f Section 3

T he company’s weighted average cost is closest to: