Tokyo Food Supplies Corporation sold an issue of 12-year bonds. The bonds sold at 980 each. After issuance costs, Tokyo Food Supplies received 975 each. The maturity value is 1,000 each and the coupon rate is 9 and paid annually.
What is the after-tax cost of debt for these bonds if Tokyo Food Supplies' marginal tax rate is 40?
A) 5.61
B) 9.36
C) 9.28
D) 5.57
The cost of external equity is greater than the cost of internal equity because
A) it decreases the earnings per share.
B) it increases the market price of the stock.
C) dividends are increased.
D) of the flotation or issuance costs.
Which of the following should not be included in a firm's cost of capital estimation?
A) the cost of permanent sources of short-term debt
B) the cost of common stock
C) the cost of retained earnings
D) the cost of seasonal sources of short-term debt
Which answer appropriately ranks the securities according to seniority risk, from highest risk first to lowest risk last?
A) common stock, bonds, preferred stock
B) preferred stock, common stock, bonds
C) common stock, preferred stock, bonds
D) bonds, preferred stock, common stock
The cost of raising capital with debt is typically less costly for a firm than raising capital with preferred stock. Which one of the following is one of the reasons for this?
A) Preferred stocks are more senior than bonds.
B) Interest is a tax-deductible cost, preferred dividends are not.
C) Bonds generally have a longer maturity than preferred stocks.
D) The interest from bonds is compounded more frequently than the dividends from preferred stocks.
A firm's weighted average cost of capital should not do which one of the following?
A) measure the cost of short-term sources of funds
B) measure cost on a marginal basis
C) measure cost on an after-tax basis
D) measure the cost of long-term sources of funds
What is meant by measuring the weighted average cost of capital on a marginal basis?
A) to measure only the cost of historic capital
B) to measure the cost on a weighted average basis of both new and historic capital
C) to measure only the cost of new capital
D) to measure only the cost of internal capital
Which model is typically used to estimate the cost of using external equity capital?
A) dividend valuation model
B) capital asset pricing model
C) arbitrage pricing theory model
D) rate of return on perpetuity model
__________ represents the long-term or permanent sources of the firm's financing.
A) Financial structure
B) Equity structure
C) Capital structure
D) Leverage structure
Why is external common equity capital more expensive then internal common equity capital?
A) Actually, external equity is not more expensive than internal, they both have the same cost.
B) Because the capital asset pricing model is used to estimate the cost of internal and the dividend valuation model is used to estimate cost of external.
C) Because internal is free, it has no cost since there is no need to attract investors to raise internal equity.
D) Because the cost of external must take into account flotation costs, internal does not.
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