Finance MC questions: effects on WACC, cost of preferred stock, bond values

1.As a source of financing, once retained earnings have been exhausted, the weighted average cost of capital will

1. 1. increase.
2. 2. decrease.
3. 3. change in an undetermined direction.
4. 4. remain the same.

2.A firm has determined it can issue preferred stock at $115 per share par value. The stock will pay a $12 annual dividend. The cost of issuing and selling the stock is $3 per share. The cost of the preferred stock is

1. 1. 12 percent.
2. 2. 6.4 percent.
3. 3. 10.7 percent.
4. 4. 10.4 percent.

3.A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost of issuing and selling the stock was $2 per share. The firm's marginal tax rate is 40 percent. The cost of the preferred stock is

1. 1. 9.8 percent.
2. 2. 6.1 percent.
3. 3. 10.2 percent.
4. 4. 3.9 percent.

4.When determining the after-tax cost of a bond, the face value of the issue must be adjusted to the net proceeds amounts by considering

1. 1. the approximate returns.
2. 2. the taxes.
3. 3. the flotation costs.
4. 4. the risk.

5.The cost of retained earnings is

1. 1. irrelevant to the investment/financing decision.
2. 2. zero.
3. 3. equal to the cost of common stock equity.
4. 4. equal to the cost of a new issue of common stock.

6.If a corporation has an average tax rate of 40 percent, the approximate, annual, after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950 is

1. 1. 6.0 percent.
2. 2. 10.6 percent.
3. 3. 10 percent.
4. 4. 7.6 percent.

7.Given that the cost of common stock is 18 percent, dividends are $1.50 per share, and the price of the stock is $12.50 per share, what is the annual growth rate of dividends?

1. 1. 5 percent.
2. 2. 4 percent.
3. 3. 8 percent.
4. 4. 6 percent.

8.A tax adjustment must be made in determining the cost of ________.

1. 1. preferred stock
2. 2. common stock
3. 3. long-term debt
4. 4. retained earnings