Exam: 500304RR – Cost of Capital and Financial Policy

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Questions 1 to 20: Select the best answer to each question. Note that a question and its answers may be split across a page break, so be sure that you have seen the entire question and all the answers before choosing an answer.

1. The interest tax shield is a key reason why A. the net cost of debt to a firm is generally less than the cost of equity.

B. the value of an unlevered firm is equal to the value of a levered firm.

C. the cost of debt is equal to the cost of equity for a levered firm.

D. firms prefer equity financing over debt financing.

2. The unlevered cost of capital refers to the cost of capital for A. a privately owned entity.

B. a corporate shareholder.

C. a governmental entity.

D. an all-equity firm.

3. Deep Mines has 14 million shares of common stock outstanding with a beta of 1.15 and a market price of $42 a share. There are 900,000 shares of 9 percent preferred stock outstanding, valued at $80 a share. The 10 percent semiannual bonds have a face value of $1,000 and are selling at 91 percent of par. There are 220,000 bonds outstanding that mature in 17 years. The market risk premium is 11½ percent, T-bills are yielding 7½ percent, and the firm’s tax rate is 32 percent. What discount rate should the firm apply to a new project’s cash flows if the project has the same risk as the firm’s typical project? A. 14.72 percent