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Multiple Choice Questions

6. Assume that the after-tax cost of debt is 7%, the cost of preferred stock is 9%, and the cost of common stock is 12%. Debt is 50% of long-term financing, preferred stock is 15%, and common stock is 35%. What is the weighted average cost of capital?
a. 9.33%
b. 10.25%
c. 9.05%
d. 8.89%

7. A company has just announced that it will pay a dividend of $2.00 on December 31. Investors will receive the dividend if owning the stock no later than December 15. December 15 is known as the :
a. Declaration Date
b. Holder-of-Record Date
c. Ex-Dividend Date
d. Payment Date

8. You are thinking of buying a miniature golf course for $20,000. It is expected to generate cash flows of $5,000 in year 1, $10,000 year 2 and $25,000 in year 3. If the cost of capital is 10% what is the net present value (NPV) of this business opportunity?
a. $31,593
b. $40,000
c. $20,000
d. $11,593

9. The Bonds of Microfood, Inc. carry a 10% annual coupon, have a $1,000 face value, and mature in 4 years. Bonds of equivalent risk yield 7%. The market value of the bonds should be
a. $1,011.20
b. $1,087.25
c. $1,095.66
d. $1,101.62
e. $1,160.25

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6. Assume that the after-tax cost of debt is 7%, the cost of preferred stock is 9%, and the cost of common stock is 12%. Debt is 50% of long-term financing, preferred stock is 15%, and common stock is 35%. What is the weighted average cost of capital?
a. 9.33%
b. 10.25%
c. 9.05%
d. 8.89%

Answer: c. 9.05%

Weightage

Debt= 50%
Preferred stock= 15%
Common stock= 35%

Cost

Debt= 7%
Preferred stock= 9%
Common stock= 12%

weighted average cost of capital =weightage x cost= 9.05% =.50x7%+.15x9%+.35x12%

7. A company has just announced that it will pay a dividend of $2.00 on December 31. Investors will receive the dividend if owning the stock no later than December 15. December 15 is known as the :
a. Declaration Date
b. Holder-of-Record ...

Solution Summary

The solution provides answers and explanations for 4 multiple choice questions.

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