31. You own a stock that has an expected return of 15.72 percent
and a beta of 1.33. The U.S. Treasury bill is yielding 3.82 percent
and the inflation rate is 2.95 percent. What is the expected rate
of return on the market?
a. 12.07 percent b. 12.77 percent c. 13.64 percent d. 14.09
percent
32. For a risky security to have a positive expected return but
less risk than the overall market, the security must have a beta:
a. of zero. b. that is > 0 but < 1. c. of one. d. that is
> 1.
33. The weighted average cost of capital is defined as the weighted
average of a firm's: a. return on all of its investments. b. cost
of equity, cost of preferred, and its aftertax cost of debt. c.
pretax cost of debt and its preferred and common equity securities.
d. common and preferred stock.
34. An increase in a levered firm’s tax rate will: a. decrease the
cost of preferred stock.
b. increase both the cost of preferred stock and debt. c. decrease
the firm’s cost of capital. d. increase the firm’s WACC.
35. A firm has multiple divisions of similar nature, yet varying
degrees of risk. Which one of the following would be the most
appropriate, yet relatively easy, means of assigning discount rates
to each of its numerous proposed investments? a. Assign every
project a rate equal to the firm's cost of equity b. Assign every
investment a random rate that varies between the firm's cost of
debt and its cost of equity c. Assign every project a rate equal to
the firm's WACC plus or minus a subjective adjustment d. Assign
every project a rate equal to the market rate of return at the time
of the proposal
36. The 7.5 percent preferred stock of Rock Bottom Floors is
selling for $84 a share. What is the firm's cost of preferred stock
if the tax rate is 35 percent and the par value per share is $100?
a. 7.50 percent b. 8.13 percent c. 8.93 percent d. 9.14 percent
37. Musical Charts just paid an annual dividend of $1.84 per
share. This dividend is expected to increase by 2.1 percent
annually. Currently, the firm has a beta of 1.12 and a stock price
of $31 a share. The riskfree rate is 4.3 percent and the market
rate of return is 13.2 percent. What is the cost of equity capital
for this firm?
a. 13.28 percent b. 11.21 percent c. 12.29 percent d. 11.95
percent
38. K's Bridal Shoppe has 4,000 shares of common stock outstanding
at a price of $13 a share. It also has 500 shares of preferred
stock outstanding at a price of $22 a share. There are 50 bonds
outstanding that have a semiannual coupon payment of $25. The bonds
mature in four years, have a face value of $1,000, and sell at 98
percent of par. What is the capital structure weight of the common
stock?
a. 48.20 percent b. 49.68 percent c. 48.15 percent d. 46.43
percent
39. Western Electric has 21,000 shares of common stock outstanding
at a price per share of $61 and a rate of return of 15.6 percent.
The firm has 11,000 shares of $8 preferred stock outstanding at a
price of $48 a share. The outstanding debt has a total face value
of $275,000 and currently sells for 104 percent of face. The yield
to maturity on the debt is 8.81 percent. What is the firm's
weighted average cost of capital if the tax rate is 35 percent?
a. 14.52 percent b. 13.44 percent c. 14.19 percent d. 14.37
percent
40. Kelly's uses the firm's WACC as the required return for some of
its projects. For other projects, the firms uses a rate equal to
WACC plus one percent, while another set of projects is assigned
rates equal to WACC minus some amount. Which one of the following
factors should be the key factor the firm uses to determine the
amount of the adjustment it will make when assigning a discount
rate to a specific project?
a. The current market rate of interest
b. Actual source of funds used to finance the project c. The
perceived risk level of project d. The firm’s current debt-equity
ratio
31. You own a stock that has an expected return of 15.72 percent and a beta...
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