Question 1

If a firm adopts a large proportion of above-average-risk investment projects that are not offset by below-average-risk investment projects, ____.

	a.	the average risk premium for the firm will decline
	b.	its cost of capital will fall
	c.	the risk-free rate will increase as more risk is added
	d.	its cost of capital will rise

Calculate the after-tax cost of preferred stock for Ohio Valley Power Company, which is planning to sell $100 million of $3.25 cumulative preferred stock to the public at a price of $25 per share. Flotation costs are $1.00 per share. Ohio Valley has a marginal income tax rate of 40%.

	a.	7.8%
	b.	13.0%
	c.	13.54%
	d.	8.12%

Crickentree has a target capital structure of 30% debt and 70% equity. If the firm expects to have a net income of $1.7 million and a dividend payout ratio of 40%, what will be its equity break point?

	a.	$2,428,571
	b.	$971,429
	c.	$1,457,143
	d.	$3,400,000

Question 4

It is difficult for small firms to apply for the dividend valuation model because ____.

	a.	small firms often pay little or no dividends
	b.	of prohibitively high common stock issuance costs
	c.	the dividend valuation model depends on the Capital Asset Pricing Model, which small firms cannot use
	d.	of limited access to the capital markets for new equity

Question 5

A firm is determining its cost of common stock equity. It last paid a dividend of $0.52, the dividends are growing at 5%, flotation costs are $2 per share, and the firm will net $72 per share upon the sale of the stock. What is the firms cost of common equity?

	a.	6.11%
	b.	3.49%
	c.	5.76%
	d.	8.22%

Question 6

Rank in ascending order (lowest to highest) investors' required rates of return on the various types of corporate securities.

	a.	common stock, preferred stock, corporate debt
	b.	preferred stock, common stock, corporate debt
	c.	corporate debt, preferred stock, common stock
	d.	preferred stock, corporate debt, common stock

Northeast Airlines (NA) has a current dividend of $1.80. Dividends are expected to grow at a rate of 7% a year into the foreseeable future. What is NA's cost of external equity if its stock can be sold to net $46 a share?

	a.	11.2%
	b.	7.2%
	c.	21.0%
	d.	10.9%

Surfin Bubba Surfboard Shop is currently selling for $34.25 a share with a current dividend of $1.00. It is estimated that Surfin Bubba will have a growth rate in earnings of 10% into the foreseeable future. If Surfin Bubba plans to raise new capital for expansion, what is the cost of new equity if flotation costs are 8% of the price?

	a.	10.87%
	b.	13.49%
	c.	12.21%
	d.	11.57%

Question 9

Groves Inc. pays an annual dividend of $1.22. This dividend is expected to continue growing at a rate of about 5% each year. The firm is in a fairly risky business and has a beta of 1.45. The expected market rate of return is 13.5%, and the risk-free rate is 9.3%. What is the cost of equity for Groves?

	a.	13.5%
	b.	6.1%
	c.	19.6%
	d.	15.4%

Question 10

A firm has a beta of 1.2. The return in the market is 14%, and the risk-free rate is 6%. The estimated cost of common stock equity is ____.

	a.	7.2%
	b.	14%
	c.	15.6%
	d.	6%