# Cost of capital

2. The flotation costs of issuing new securities

A.decrease the cost of capital.

B.encourage the retention of earnings.

C.encourage external financing.

D.don't affect the cost of capital.

4.Which of the following statements about the cost of debt is correct?

A.The cost of debt is less than the cost of equity.

B.The cost of debt is greater than the cost of equity.

C.The cost of debt is equal to the firm's interest rate.

D.The cost of debt is greater than the cost of preferred stock.

6.The optimal capital structure involves

A.minimizing the cost of all funds.

B.maximizing the cost of all funds.

C.minimizing the weighted average of the cost of funds.

D.maximizing the weighted average of the cost of funds.

Use the information in the following table to answer Questions 7, 8, 9, 10,

and 11.

7.According to the information provided in the table, what is the cost of

debt?

A.2.45 percent

B.4.55 percent

C.6.25 percent

D.7.0 percent

8. According to the information in the table, what is the cost of preferred

stock?

A.8 percent

B.9 percent

C.10 percent

D.12 percent

9.According to the information in the table, what is the cost of equity using

the capital asset pricing model (CAPM)?

A.12 percent

B.13.2 percent

C.13.95 percent

D.14.4 percent

10.

According to the information in the table, what is the cost of equity using

the bond yield plus risk premium method?

A.12 percent

B.13.2 percent

C.13.95 percent

D.14 percent

11. According to the information in the table, what is the cost of equity using

the expected growth method?

A.12 percent

B.13.2 percent

C.13.95 percent

D.14.4 percent

13. Which of the following statements about retained earnings is correct?

A.Retained earnings have no cost.

B.Retained earnings are the firm's cheapest source of funds.

C.Retained earnings have the same cost as new shares of stock.

D.Retained earnings are cheaper than the cost of new shares.

Use the following information to complete Questions 14, 15, 16, and 17.

A firm has two investment opportunities. Each investment costs $2,000, and

the firm's cost of capital is 8 percent. The cash flows of each investment

are shown in the following table:

14. According to the information in the table, the NPV for Investment A is

A.$871.

B.$1,300.

C.$2,871.

D.$3,300.

15. According to the information in the table, the NPV for Investment B is

A.$980.

B.$1,600.

C.$2,980.

D.$3,600.

16.Based on the information in the table, if the investments are mutually

exclusive, the firm should select

A. the higher NPV investment.

B.both investments.

C.neither investment.

D.the higher payback investment.

17. Based on the information in the table, if the investments are independent,

the firm should select

A.the higher IRR investment.

B.all investments with an IRR that's greater than 8 percent.

C.all investments with an IRR that's less than 8 percent.

D.only one investment if the IRR is greater than 8 percent.

20.Which of the following statements about the marginal cost of capital is

correct?

A.The marginal cost of capital is a firm's cost of debt and equity finance.

B.The marginal cost of capital is constant once the optimal capital structure

is determined.

C.The marginal cost of capital declines as flotation costs alter equity

financing.

D.The marginal cost of capital refers to the cost of additional funds.

#### Solution Preview

2. The flotation costs of issuing new securities

A.decrease the cost of capital.

B.encourage the retention of earnings.

C.encourage external financing.

D.don't affect the cost of capital.

4.Which of the following statements about the cost of debt is correct?

A.The cost of debt is less than the cost of equity.

B.The cost of debt is greater than the cost of equity.

C.The cost of debt is equal to the firm's interest rate.

D.The cost of debt is greater than the cost of preferred stock.

6.The optimal capital structure involves

A.minimizing the cost of all funds.

B.maximizing the cost of all funds.

C.minimizing the weighted average of the cost of funds.

D.maximizing the weighted average of the cost of funds.

Use the information in the following table to answer Questions 7, 8, 9, 10,

and 11.

7.According to the information ...

#### Solution Summary

This discusses the computation of Cost of capital