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1.1 Nico Trading Corp is considering issuing long-term debt. The debt would have a 30 year maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm\'s tax rate is 35 percent. Given this information, the after tax cost of debt for Nico Trading would be:

a) 7.26%
b) 11.17%
c) 10.0%
d) none of the above

1.3 As a source of financing, once retained earnings have been exhausted, the weighted average cost of capital will:

a) increase.
b) remain the same.
c) decrease.
d) change in an undetermined direction.

1.4 A firm has common stock with a market price of \$100 per share and an expected dividend of \$5.61 per share at the end of the coming year. A new issue of stock is expected to be sold for \$98, with a \$2 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total \$1 per share. The dividends paid on the outstanding stock over the past five years are as follows:
Year Dividend
1
2
3
4
5 \$4.00
\$4.28
\$4.58
\$4.90
\$5.24

The cost of this new issue of common stock is:

a) 5.8 percent
b) 7.7 percent
c) 10.8 percent
d) 12.8 percent

1.6 The wealth-maximizing investment decision for a firm occurs when

a) the cost of capital equals the return on the project
b) the weighted marginal cost of capital is less than the investment opportunity schedule
c) the weighted cost of capital exceeds the marginal cost of capital
d) the weighted marginal cost of capital equals the investment opportunity schedule

1.8 A firm has determined its cost of each source of capital and optimal capital structure which is composed of the following sources and target market value proportions:

Source of Capital Target Market
Proportions
After-Tax Cost
Long-term debt
Preferred stock
Common stock equity 40%
10%
50% 6%
11%
15%

The weighted average cost of capital is:

a) 6 percent
b) 10.7 percent
c) 11 percent
d) 15 percent

1.14 The inexpensive nature of long-term debt in a firm\'s capital structure is due to the fact that

a) the equity holders are the true owners of the firm
b) equity capital has a fixed return
c) interest payments are tax-deductible
d) equity holders have a higher position in the priority of claims

1.18 Tangshan Mining has common stock at par of \$200,000, paid in capital in excess of par of \$400,000, and retained earnings of \$280,000. In states where the firm\'s legal capital is defined as the total of par value and paid-in capital of common stock, the firm could pay out_______in cash dividends without impairing its capital.

a) \$280,000
b) \$400,000
c) \$480,000
d) \$600,000

1.19 At the quarterly meeting of Tanshan Mining Corporation held on September 10, the directors declared a \$1.00 per share dividend for the firm\'s 100,000 shares of common stock outstanding. The net effect of declaring and paying this dividend would be to:

a) decrease total assets by \$100,000 and increase stockholder\'s equity by \$100,000
b) decrease total assets by \$100,000 and decrease stockholder\'s equity by \$100,000
c) increase total assets by \$100,000 and increase stockholder\'s equity by \$100,000
d) increase total assets by \$100,000 and decrease stockholder\'s equity by \$100,000

1.20 Modigliani and Miller suggest that the value of the firm is not affected by the firm\'s dividend policy, due to:

a) the relevance of dividends
b) the clientele effect
c) the informational content
d) the optimal capital structure

1.21 What would be the cost of retained earnings equity for Tangshan Mining if the expected return on U.S. Treasury Bills is 5.00 percent, the market risk premium is 10.00 percent, and the firm\'s beta is 1.3?

a) 11.5%
b) 18.0%
c) 10.0%
d) none of the above

1.22 A firm has issued preferred stock at its \$125 per share par value. The stock will pay a \$15 annual dividend. The cost of issuing and selling the stock was \$4 per share. The cost of the preferred stock is:

a) 7.2 percent
b) 12 percent
c) 12.4 percent
d) 15 percent

Table 11.1

A firm has determined its optimal structure which is composed of the following sources and target market value proportions.

Source of Capital Target Market
Proportions
Long-term debt
Preferred stock
Common stock equity 20%
10%
70%

Debt: The firm can sell a 12-year, \$1,000 par value, 7 percent bond for \$960. A flotation cost of 2 percent of the face value would be required in addition to the premium of \$40.

Preferred Stock: The firm has determined it can issue preferred stock at \$75 per share par value. The stock will pay a \$10 annual dividend. The cost of issuing and selling the stock is \$3 per share.

Common Stock: A firm\'s common stock is currently selling for \$18 per share. The dividend expected to be paid at the end of the coming year is \$1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was \$1.50. It is expected that to sell, a new common stock issue must be underpriced \$1 per share in flotation costs. Additionally, the firm\'s marginal tax rate is 40 percent.

1.23 The firm\'s after-tax cost of debt is: (see Table 11.1.)

a) 3.25 percent
b) 4.6 percent
c) 8 percent
d) 8.13 percent

Table 11.2

A firm has determined its optimal structure which is composed of the following sources and target market value proportions.

Source of Capital Target Market
Proportions
Long-term debt
Common stock equity 60%
40%

Debt: The firm can sell a 15-year, \$1,000 par value, 8 percent bond for \$1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of \$50.

Common Stock: A firm\'s common stock is currently selling for \$75 per share. The dividend expected to be paid at the end of the coming year is \$5. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was \$3.10. It is expected that to sell, a new common stock issue must be underpriced \$2 per share and the firm must pay \$1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent.

1.27 Assuming the firm plans to pay out all its earnings as dividends, the weighted average cost of capital is: (see Table 11.2. above)

a) 9.6 percent
b) 10.9 percent
c) 11.6 percent
d) 12.1 percent

1.30 The cost utilized in making capital budgeting decisions given an investment opportunity schedule is:

a) the weighted average cost of all needed financing for funding
b) the simple average of the cost of the last incremental amount of financing
c) the weighted average cost of the last incremental amount of financing
d) the weighted average cost of all bonds issued that are related to the capital budget.