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

Answer 1

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)