1. the book value of a firm\'s capital accounts: a.should be used when evaluatin
ID: 2824996 • Letter: 1
Question
1. the book value of a firm's capital accounts:
a.should be used when evaluating new projects
b. flucutates frequently
c, represents cost of existing capital
d. a & c
2. The cost of new equity would increase with an increase in
a. growth rate
b. stock price
c. flotation costs
d. a & c
e. all the above
3. If a firm had the following mix of capital components:
Debt $25,000
Preferred stock $20,000
Common stock $55,000
its capital structure would be described as:
a. 25% debt 75% equity
b. 25% debt, 20% preferred stock, 55% equity
c. 45% debt 55% equity
d. both a and b
4.
In the calculation of the component cost of a firm 's debt, the yield-to-maturity on the firm 's bonds:
a. is equal to the component cost of debt.
b. must be adjusted for expected capital gains or losses on the bonds.
c. must be adjusted for the tax-deductibility of interest expense.
d. both b & c
a. is equal to the component cost of debt.
b. must be adjusted for expected capital gains or losses on the bonds.
c. must be adjusted for the tax-deductibility of interest expense.
d. both b & c
Explanation / Answer
1). Answer d
Book value as well as market values can be used for evaluation of new projects and book value of firm capital account represents cost of existing capital.
2). Answer d
Flotation costs are costs associated with the issuance of new equity or debt - often due to underwriting fees
increase growth rate firm/dividends, increase return required (Gordan Growth), increase cost of equity capital
3). Answer b
Total capital = 100,000
Equity = (55000/100,000) * 100 = 55%
Preferred stock= (2000/100,000) * 100 = 20%
Debt= (25000/100,000) * 100 = 25%
4). Answer c.
After-tax cost of debt = equal to the interst rate of company's debt R d ( 1 - ?ax)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.