Question 1: Which of the following is not true regarding the cost of retained earnings?
- it is relevant to the WACC
- does not require new funds to be raised
- has associated flotation costs
- has a cost, which is the opportunity cost associated with stockholder funds
Question 2: A project has the following cash flows. What is the internal rate of return?
Year 0 1 2 3
Cash Flow -$195,600 $99,800 $87,600 $75,300
less than 5%
between 5 and 15%
between 15 and 18%
more than 21%
Question 3: Which one of the following is a correct statement regarding a firm's weighted average cost of capital (WACC)?
- the WACC can be used as the required return for all new projects.
- the WACC of a leveraged firm will decrease when the tax rate decreases.
- an increase in the market risk premium will tend to decrease a firm's WACC.
- the WACC is a starting point for the subjective approach to setting discount rates.
- a reduction in the risk level of a firm will tend to increase the firm's WACC.
Question 4: The six percent preferred stock of FKH Manufacturing is selling for $62 a share. What is the firm's cost of preferred stock, if the tax rate is 34 percent and the par value per share is $100?
- 5.98%
- 7.06%
- 8.05%
- 9.68%
- 10.10%
Question 5: Which one of the following statements is true concerning a bankruptcy?
- a Chapter 7 bankruptcy is a reorganization proceeding.
- a "prepack" is intended to shorten the time a firm spends in bankruptcy.
- the absolute priority rule applies to both Chapter 7 and Chapter 11 bankruptcy proceedings, and must be adhered to by the courts.
- creditors cannot force a firm into bankruptcy, even though they might like to do so.
- a reorganization plan, can only be approved if the firm's creditors all agree with the plan.