Midterm Examination International Business Trade 1. The value of the stock A. Increases as the dividend growth rate decreases B. Increases as the required rate of return decreases C. Increases as the required rate of return increases D. None of the given responses 2. The overall cost of long-term financing for the firm is called the: A. weighted average cost of capital B. cost of preferred stock C. retained earnings breakpoint D. none of the given choices 3. The overall weighted average cost of capital is used instead of costs for specific sources of funds because A. the use of the case for specific sources of capital would make investment decisions inconsistent. B. a project with the highest return would always be accepted under the specific cost criteria. C. an investment funded by equity or debt is not relevant to this question D. none of the given choices. 4. Which of the following is not a component used in calculating the cost of capital? A. Cost of short-term debt. B. Cost of long-term debt. C. Cost of common stock D. Cost of retained earnings: 5. The most expensive source of financing for a firm is: A. debt B. preferred stock C. retained earnings D. new common stock 6. The cost of capital at the retained earnings breakpoint is the: A weighted average cost of capital B. marginal cost of capital C. cost of new stock D. none of the given choices 7. Which of the following is not associated with the cost of capital concept? A Minimum rate of return on new projects. B. Weighted average of cost of new funds raised. C. The required rate of return of investors. D. The historical cost of funds. 8. Which of the following is likely to increase a firm's cost of capital? A. Increasing the proportion of equity in the firm. B. Increasing the proportion of debt in the firm. C. The consideration of a below-average risk project. D. Expectation of lower inflation in the future. 9. Which of the following are acceptable criteria for determining the weights in weighted average cost of capital? A. Market value of the capital structure and historical costs of financing B. Market value of capital structure and the target mix of debt and equity C. Using the after-tax cost of debt and the market value of the capital structure. D. Using book values of the capital structure and the prior level of debt and equity 10. The market risk premium is the: A. difference between the rate of return on an asset and the risk-free rate. B. difference between the rate of return on the market portfolio and the risk free rate. C. risk-free rate. D. market rate of return. 11. If a firm uses the same company cost of capital for evaluating all projects, which of the following is likely? A. Rejecting good low-risk projects B. Accepting poor high-risk projects C. Both choices are correct D. Neither of the choices is correct 12. Using the company's cost of capital to evaluate a project is: A. always correct B. always incorrect C. correct for projects that are about as risky as the average of the firm's other assets D. none of the given choices 13. Paramount Company's stock is expected to generate a dividend and terminal value one year from now of P57.00. The stock has a beta of 1.3, the risk-free interest rate is 6 percent, and the expected return market return is 11 percent. What should the equilibrium price of Investors' stock in the market now? A. P50.67 B. P43.85 C. P53.77 D. P41.22 14. The Beach Corporation pays annual dividends of P6.00 on the cumulative preferred stock. What is the current value of this stock if an investor requires a 10 percent annual rate of return? A. P 60 B. P 6 C. P600 D. P 10 15. What is the current price of a share of stock when last year's dividend was P3.00, the growth rate is 6 percent, and the investor’s required rate of return is 12 percent? A. P25.00 B. P26.59 C. P50.00 D. P53.00 16. Assume the following information about a firm's capital components: Capital Structure Cost Debt Debt P 2M 8% Preferred stock P 2M 11% Common stock P 6M 14% What is the firm's weighted average cost of capital? A. 11.00% B. 11.90% C. 12.05% D. 12.20% 17. 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%
