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##### Which of the following statements best explains why a rising ratio of debt-to-total assets increases the cost of debt?

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1. Which of the following statements best explains why a rising ratio of debt-to-total assets increases;the cost of debt?;A. As the ratio increases, creditors require higher interest rates to compensate them for higher default;risk.;B. As total assets decline in relation to a stable debt level, equity declines.;C. As debt increases, the contribution of more expensive equity financing decreases.;D. If debt remains constant while the ratio increases, rising assets must be finance with more expensive;equity financing.;2. If the net present values of two mutually exclusive investments are positive, a firm should select;A. both investments.;B. neither investment.;C. the investment with the higher present value.;D. the investment with the higher net present value.;3. The flotation costs of issuing new securities;A. decrease the cost of capital.;B. encourage the retention of earnings.;C. encourage external financing.;D. don?t affect the cost of capital.;4. Which of the following statements about the cost of debt is correct?;A. The cost of debt is equal to the firm?s interest rate.;B. The cost of debt is greater than the cost of equity.;C. The cost of debt is less than the cost of equity.;D. The cost of debt is greater than the cost of preferred stock.5.;The optimal capital structure involves;5. The optimal capital structure involves;A. minimizing the cost of all funds.;B. maximizing the cost of all funds.;C. minimizing the weighted average of the cost of funds.;D. maximizing the weighted average of the cost of funds.;6. The internal rate of return and net present value methods of capital budgeting assume that the cash;flows are reinvested at the;A. cost of capital.;B. internal rate of return.;C. cost of capital for IRR and the internal rate of return for NPV.;D. cost of capital for NPV and the internal rate of return for IRR.;Use the information in the following table to answer Questions 7, 8, 9, 10, and 11.;Coupon Rate = 7 percent Marginal Tax Rate = 35 percent;Average Tax Rate = 32 percent Common Stock dividend (D0) = $6;Price of Common Stock = $80 Preferred Stock dividend = $4;Price of preferred stock = $50 Growth rate of common stock dividend = 6;percent;Bond yield risk premium = 7 percent Risk-free rate of return = 6 percent;Return on market = 12 percent Beta = 1.2;7. According to the information provided in the table, what is the cost of debt?;A. 2.45 percent C. 6.25 percent;B. 4.55 percent D. 7.0 percent;8. According to the information in the table, what is the cost of preferred stock?;A. 8 percent C. 10 percent;B. 9 percent D. 12 percent;9. According to the information in the table, what is the cost of equity using the capital asset pricing;model (CAPM)?;A. 12 percent C. 13.95 percent;B. 13.2 percent D. 14.4 percent;10. According to the information in the table, what is the cost of equity using the bond yield plus risk;premium method?;A. 12 percent C. 13.95 percent;B. 13.2 percent D. 14 percent;11. According to the information in the table, what is the cost of equity using the expectedgrowth;method?;A. 12 percent C. 13.95 percent;B. 13.2 percent D. 14.4 percent;12. A firm should make an investment if the present value of the cash inflows on the investment is;A. less than zero.;B. greater than zero.;C. less than the cost of the investment.;D. greater than the cost of the investment.;13. Which of the following statements about retained earnings is correct?;A. Retained earnings have no cost.;B. Retained earnings are the firm?s cheapest source of funds.;C. Retained earnings have the same cost as new shares of stock.;D. Retained earnings are cheaper than the cost of new shares.;Use the following information to complete Questions 14, 15, 16, and 17.;A firm has two investment opportunities. Each investment costs $2,000, and the firm?s cost of capital is;8 percent. The cash flows of each investment are shown in the following table;Cash Flow of Investment A Cash Flow of Investment B;Year 1 $1800 $900;Year 2 $600 $900;Year 3 $500 $900;Year 4 $400 $900;14. According to the information in the table, the NPV for Investment A is;A. $871. C. $2,871.;B. $1,300. D. $3,300.;15. According to the information in the table, the NPV for Investment B is;A. $980. C. $2,980.;B. $1,600. D. $3,600.;16. Based on the information in the table, if the investments are mutually exclusive, the firm should;select;A. neither investment.;B. both investments.;C. the higher-NPV investment.;D. the higher-payback investment.;17. Based on the information in the table, if the investments are independent, the firm should select;A. the higher IRR investment.;B. all investments with an IRR that?s greater than 8 percent.;C. all investments with an IRR that?s less than 8 percent.;D. only one investment if the IRR is greater than 8 percent.;18. A firm should reject an investment if the internal rate of return (IRR) on the investment is;A. greater than the cost of capital. C. greater than the interest rate.;B. less than the cost of capital. D. less than the interest rate.;19. The net present value of an investment will be higher if;A. the cost of capital is higher.;B. there?s no salvage value.;C. the cost of the investment is lower.;D. a firm uses straight-line depreciation.;20. Which of the following statements about the marginal cost of capital is correct?;A. The marginal cost of capital is a firm?s cost of debt and equity finance.;B. The marginal cost of capital is constant once the optimal capital structure is determined.;C. The marginal cost of capital declines as flotation costs alter equity financing.;D. The marginal cost of capital refers to the cost of additional funds.

Paper#79408 | Written in 18-Jul-2015

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