1.

Capital structure decisions refer to the:

A. Dividend yield of the firm's stock

B. Blend of equity and debt used by the firm

C. Capital gains available on the firm's stock

D. Maturity date for the firm's securities

2. What appears to be the targeted debt ratio of a firm that issues $15 million in bonds and $35 million
in equity to finance its new capital projects?

A. 15.00% B. 30.00% C. 35.00% D. 60.00%

3. Proposed assets can be evaluated using the company cost of capital providing that the:

A. Firm does not pay taxes

B. Firm is all equity financed

C. Cost of debt is less than the cost of equity

D. New assets have the same risk as existing assets

4. The company cost of capital for a firm with a 60/40 debt/equity split, 8% cost of debt, 15% cost of
equity, and a 35% tax rate would be:

A. 7.02% B. 9.12% C. 10.80% D. 13.80%

5. The company cost of capital, after tax, for a firm with a 60/40 debt/equity split, 8% cost of debt, 15%
cost of equity, and a 35% tax rate would be:

A. 7.02% B. 9.12% C. 10.80% D. 13.80%

6. Why is debt financing said to include a tax shield for the company?
A. Taxes are reduced by the amount of the debt

B. Taxes are reduced by the amount of the interest

C. Taxable income is reduced by the amount of the debt

D. Taxable income is reduced by the amount of the interest

7. What is the pretax cost of debt for a firm in the 35% tax bracket that has a 9% after-tax cost of debt?

A. 5.85% B. 12.15% C. 13.85% D. 25.71%

8. How much is added to a firm's weighted average cost of capital for 45% debt financing with a required
rate of return of 10% and a tax rate of 35%?

A. 1.29% B. 2.93% C. 3.50% D. 4.50%

9. What is the WACC for a firm with 50% debt and 50% equity that pays 12% on its debt, 20% on its
equity, and has a 40% tax rate?

A. 9.6% B. 12.0% C. 13.6% D. 16.0%

10. Company X has 2 million shares of common stock outstanding at a book value of $2 per share. The
stock trades for $3.00 per share. It also has $2 million in face value of debt that trades at 90% of par.
What is its ratio of debt to value for WACC purposes?

A. 15.38% B. 28.6% C. 31.0% D. 33.3%

11. What is the after-tax cost of preferred stock that sells for $10 per share and offers a $1.20 dividend
when the tax rate is 35%?

A. 4.20% B. 7.80% C. 8.33% D. 12.00%

d
12. What is the WACC for a firm using 55% equity with a required return of 15%, 35% debt with a
required return of 8%, 10% preferred stock with a required return of 10%, and a tax rate of 35%?

A. 10.72% B. 11.07% C. 11.70% D. 12.05%

13. Should a project be accepted if it offers an annual after-tax cash flow of $1,250,000 indefinitely,
costs $10 million, is riskier than the firm's average projects, and the firm uses a 12.5% WACC?

A. Yes, since NPV is positive

B. Yes, since a zero NPV indicates marginal acceptability

C. No, since NPV is zero

D. No, since NPV is negative

14. How much will a firm need in cash flow before tax and interest to satisfy debt holders and equity
holders if: the tax rate is 40%, there is $10 million in common stock requiring a 12% return, and $6
million in bonds requiring an 8% return?

A. $1,392,000 B. $1,488,000 C. $2,480,000 D. $2,800,000

15. How much will a firm need in cash flow before tax and interest to satisfy debt holders and equity
holders if: the tax rate is 35%, there is $13 million in common stock requiring a 10% return, and $6
million in bonds requiring an 6% return?

A. $1,392,000 B. $1,488,000 C. $2,360,000 D. $2,480,000

16. Which of the following statements is incorrect concerning the equity component of the WACC?

A. The value of retained earnings is not included

B. Market values should be used in the calculations

C. Preferred equity has a separate component

D. There is a tax shield such as with debt

d

17. What will be the effect of using book value of debt in WACC decisions if interest rates have
decreased substantially since a firm's long-term bonds were issued? \

A. The debt-to-value ratio will be overstated

B. The debt-to-value ratio will be understated

C. There will be no effect on WACC decisions

D. Cannot be determined without knowing interest rates

18. Which component is more likely to be biased if book values are used in the calculation of WACC
rather than market values?

A. Debt

B. Preferred stock

C. Common stock

D. All categories should be equally biased

19. What would you estimate to be the required rate of return for equity investors if a stock sells for $40
and will pay a $4.40 dividend that is expected to grow at a constant rate of 5%?

A. 7.6% B. 12.0% C. 12.6% D. 16.0%

20. What is the expected growth rate in dividends for a firm in which shareholders require an 18% rate
of return and the dividend yield is 10%?

A. 1.8% B. 5.2% C. 8.0% D. 28.0%

21. What dividend is paid on preferred stock if investors require a 9% rate of return and the stock has a
market value of $54.00 per share and a book value of $50.00 per share?
A. $2.92 B. $4.50 C. $4.68 D. $4.86

22. If a firm earns the WACC as an average return on its average-risk assets, then:

A. Equity holders will be satisfied, but bondholders will not

B. Bondholders will be satisfied, but equity holders will not

C. All investors will earn their minimum required rate of return

D. The firm is investing only in positive NPV projects

23. As debt is added to the capital structure, the:

A. WACC will continually decline

B. WACC will continually increase

C. The implied cost of debt can be expected to rise

D. WACC will be unaffected

24. An implicit cost of increasing the proportion of debt in a firm's capital structure is that:

A. The firm's asset beta will increase

B. Equity holders will demand a higher rate of return

C. The tax shield will not apply to the added debt

D. The equity-to-value ratio will decrease

25. What will happen to the required return on assets as a result of changing to a more debt-intensive
capital structure?

A. It will decrease

B. It will increase

C. It will remain unchanged although individual investor requirements will shift

D. The required rates of return for assets, debt holders, and equity holders will all remain constant

26. With respect to the WACC:

A. It is the proper discount rate for everything the company does

B. It is used to value all new projects

C. This benchmark discount rate is adjusted for the riskiness of the project

D. No adjustments need to be made when using it as the discount rate

27. Debt financing is made up of explicit and implicit costs which are:

A. A higher required ROE and the interest rate bondholders demand, respectively

B. The interest rate bondholder's demand and a higher required ROE, respectively

C. The costs of equity and debt, respectively

D. The costs of issuing bonds and the interest rate bondholders demand, respectively

28. Calculate a firm's WACC given that the total value of the firm is $2,000,000, $600,000 of which is
debt, the cost of debt and equity is 10% and 15% respectively, and the firm pays no taxes:

A. 9.0% B. 11.5% C. 13.5% D. 14.4%

29. for a firm that pays no corporate taxes, changing its capital structure will:

A. Change the total cash it pays out to investors

B. Change the risk of the cash flows

C. Change both the cash flows and the risk of the cash flows

D. Not affect the cash flows nor the risk of the cash flows

d
30. For a company that pays no corporate taxes, its WACC will be equal to:

A. The expected return on its assets

B. The expected return on its debt

C. The total value of its assets

D. The expected return on its equity