13. Which of the following statements is true?

a. Common stockholders are the true owners of a firm.

b. Capital obtained from the sale of common stock will ultimately be repaid by the corporation.

c. A corporation has a legal obligation to pay dividends on common stock.

d. Dividends on common stock usually do not grow.

14. Preferred stockholders:

a. have a right to receive dividends before common stockholders.

b. normally have voting rights.

c. generally receive a dividend that varies with the financial performance of the firm.

d. are secured creditors.

15. The XYZ Company, whose common stock is currently selling for $40 per share, is expected to pay a $2.00 dividend in the coming year. If investors believe that the expected rate of return on XYZ is 14%, what growth rate in dividends must be expected?

a. 5%

b. 14%

c. 9%

d. 6%

16. Given the following information, determine the risk-free rate.

Cost of equity = 12%

Beta = 1.50

Market risk premium = 3%

a. 8.0%

b. 7.5%

c. 7.0%

d. 6.5%

17. A company has a capital structure that consists of 50% debt and 50% equity. Which of the following is true?

a. The weighted average cost of capital is less than the cost of equity financing.

b. The cost of equity financing is greater than the cost of debt financing.

c. The weighted average cost of capital is calculated on a before-tax basis.

d. Both a and b.

18. The cost of capital is:

a. the opportunity cost of using funds to invest in new projects.

b. the rate of return the firm must earn on its investments in order to satisfy the required rate of return of the firms investors.

c. the hurdle rate for new capital investments which have typical or average risk.

d. all of the above.

19. A firm has an issue of preferred stock that pays an annual dividend of $2.00 per share and currently is selling for $20.00 per share. If the firm wishes to raise new capital by selling additional shares of preferred stock, it will net $18.50 per share. Finally, the firms marginal tax rate is 34%. This firms cost of financing with new preferred stock is:

a. 10.00%.

b. 6.60%.

c. 10.81%.

d. 7.13%.

20. Sg. Klah Mining Companys beta is 1.16, the 10-year Malaysian Govt. Securities yields 3.5% and the return on the Kuala Lumpur Composite Index is 10.5%. What is Sg. Klahs cost of retained earnings using the CAPM approach?

a. 15.685%

b. 11.62%

c. 11.95%

d. 8.12%