__b___ Which of the following is NOT a capital component, i.e., a source of inve
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Question
__b___ Which of the following is NOT a capital component, i.e., a source of investor-supplied capital?
Notes payable.
Account payable.
Long-term debt.
Preferred stock.
_____ Which of the following statements is NOT CORRECT?
The cost of capital used in capital budgeting should reflect the average cost of the various types of capital a firm uses to finance the projects.
The cost of equity is a market-determined variable in the sense that it’s shareholders’ required return.
The after-tax cost of debt, which is lower than then before-tax cost, is used as the component cost of debt for purposes of developing the firm’s WACC.
The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of preferred dividends received by a corporation may be excluded from the receiving company’s taxable income.
_____ Which of the following statements is CORRECT?
Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them.
The firm’s cost of external equity raised by issuing new stock is the same as the required rate of return on the firm’s retained earnings.
A firm’s cost of equity is highly dependent upon the risk level of the firm.
A firm’s cost of equity is inversely related to changes in the firm’s tax rate.
_____ The discount rate assigned to an individual project should be based on the
Firm's weighted average cost of capital.
Average of the firm's overall cost of capital for the past five years.
Current risk level of the overall firm.
Risks associated with the use of the funds required by the project.
_____ Which of the following would most likely cause many firm’s cost of capital to rise?
A decrease in the market interest rates.
The credit crisis is over.
Investors become less risk averse.
An increase in corporate income tax.
Explanation / Answer
1.
Capital component are those time of capital which is use by company to raise capital. usually lige of capital is more than one year but sometime comapny company issue short term debt, like note payable. Preferred stock, long term debt are considered as long term capital component and note payable is short term capital component.
So, account payable is not a capital component.
Option (B) is correct answer.
2.
The cost of preferred stock to a firm never be adjusted to an after-tax figure because 70% of preferred dividends received by a corporation may be excluded from the receiving company’s taxable income. 70% adjustment is made only to dividend on common stock.
option (D) is not correct.
3.
Cost of equity is calculated by summation of risk free rate and risk premum of stock, So, cost of equity is depends on risk level of firm. as risk level of firm increase, cost of equity will also increase.
Option (C) is correct answer.
4.
The discount rate assigned to an individual project should be based on the risks associated with the use of the funds required by the project.
Option (D) is correct answer.
5.
When, Investors become less risk averse then they wants higher return on taking extra risk. so, cost of capital of comapny increase.
Option (C) is correct answer.
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