The corporate cost of capital is the return that the business could earn by investing in alternative investments (e.g., stocks and bonds) that have the same risk its own real assets have.

True

False

Question 2 1 pts

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0 true_false_question 1360811

Long-term debt is defined as having a maturity of more than six months.

Long-term debt is defined as having a maturity of more than six months.

True

False

Question 3 1 pts

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0 multiple_choice_question 1360839

Which of the following statements about cost of capital estimation is most correct?

Which of the following statements about cost of capital estimation is most correct?

In general, at least five methods are used to estimate the cost of debt.

The corporate cost of capital is either the cost of equity or the cost of debt, whichever is greater.

The corporate cost of capital is used as the hurdle (discount) rate for all projects being evaluated in the organization.

Because there is no tax savings associated with debt issued by not-for-profit organizations, it is theoretically wrong to recognize the savings for investor-owned businesses.

None of the above statements is correct.

Question 4 1 pts

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0 true_false_question 1360836

Because not-for-profit corporations do not need to generate a return for stockholders, they do not need to be concerned with maintaining a particular level of equity capital.

Because not-for-profit corporations do not need to generate a return for stockholders, they do not need to be concerned with maintaining a particular level of equity capital.

True

False

Question 5 1 pts

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0 multiple_choice_question 1360825

Which of the following is not a source of equity capital in not-for-profit corporations?

Which of the following is not a source of equity capital in not-for-profit corporations?

Charitable donations

Government grants

Retained earnings

Bond issues

Start-up capital from religious, educational, or governmental entities

Question 6 1 pts

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0 multiple_choice_question 1360810

Which of the following statements about common stock is incorrect?

Which of the following statements about common stock is incorrect?

The preemptive right gives current stockholders the right to purchase any new shares issued by the company.

Stockholders exercise control over the company by voting for board members.

Common stockholders are the owners of for-profit corporations.

The claim of shareholders on the cash flows of the firm is limited to the dividends they receive (i.e., they have no claim on a businesss residual earnings).

In the event of bankruptcy and liquidation, shareholders often receive none of the proceeds.

Question 7 1 pts Skip to question text.

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0 multiple_choice_question 1360829

Generic Health Services has a target capital structure of 30 percent debt and 70 percent equity. Its cost of debt estimate is 10 percent, and its cost of equity estimate is 16 percent. It pays federal, state, and local taxes at a 40 percent marginal rate. What is the firms corporate cost of capital?

Generic Health Services has a target capital structure of 30 percent debt and 70 percent equity. Its cost of debt estimate is 10 percent, and its cost of equity estimate is 16 percent. It pays federal, state, and local taxes at a 40 percent marginal rate. What is the firms corporate cost of capital?

12.1 percent

12.5 percent

13.0 percent

13.8 percent

14.0 percent

Question 8 1 pts

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0 true_false_question 1360819

Obligations to repay lenders of debt capital are fixed by contract, while obligations to repay equity investors are not.

Obligations to repay lenders of debt capital are fixed by contract, while obligations to repay equity investors are not.

True

False

Question 9 1 pts

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0 true_false_question 1360832

Although the use of financial leverage (debt financing) can increase the return to the owners of a business, it also increases the riskiness of their equity investment.

Although the use of financial leverage (debt financing) can increase the return to the owners of a business, it also increases the riskiness of their equity investment.

True

False

Question 10 1 pts

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0 true_false_question 1360838

The corporate cost of capital is a blend (weighted average) of the costs of all of a businesss financing sources.

The corporate cost of capital is a blend (weighted average) of the costs of all of a businesss financing sources.

True

False

Question 11 1 pts

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0 multiple_choice_question 1360814

Which of the following statements about term structure is (are) correct?

Which of the following statements about term structure is (are) correct?

Term structure is the relationship between interest rates and debt maturities.

Term structure can be expressed either in tabular form or in graphical form.

A term structure graph is called the yield curve.

The yield curve can have a variety of shapes, but the most common is upward sloping.

All of the above statements are correct.

Question 12 1 pts

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0 true_false_question 1360822

The cost of using debt financing is limited to the principal and interest payments required under the contract.

The cost of using debt financing is limited to the principal and interest payments required under the contract.

True

False

Question 13 1 pts

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0 true_false_question 1360834

Because donors and patients do not expect a return on their investment in a not-for-profit hospital, the most appropriate cost of equity capital in a not-for-profit hospital is zero.

Because donors and patients do not expect a return on their investment in a not-for-profit hospital, the most appropriate cost of equity capital in a not-for-profit hospital is zero.

True

False

Question 14 1 pts

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0 true_false_question 1360818

Because not-for-profit corporations cannot distribute earnings to individual owners in the form of dividends, not-for-profit corporations do not have equity capital.

Because not-for-profit corporations cannot distribute earnings to individual owners in the form of dividends, not-for-profit corporations do not have equity capital.

True

False

Question 15 1 pts

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0 multiple_choice_question 1360820

Which of the following statements regarding corporate bonds is correct?

Which of the following statements regarding corporate bonds is correct?

Debentures are riskier than subordinated debentures because they are paid last in the event of bankruptcy.

Mortgage bonds are riskier than debentures because the value of the asset pledged as collateral may not be sufficient to repay the mortgage.

The interest rate on subordinated debentures is likely to be higher than the interest rate on debentures.

Debentures are secured by the asset purchased with the loaned funds.

None of the above statements is correct.

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0 true_false_question 1360828

The corporate cost of capital provides a benchmark for determining a projects cost of capital. In general, projects that are riskier than average must have a cost of capital that is higher than the corporate cost of capital, while projects that are less risky than average must have a cost of capital that is less than the corporate cost of capital.

The corporate cost of capital provides a benchmark for determining a projects cost of capital. In general, projects that are riskier than average must have a cost of capital that is higher than the corporate cost of capital, while projects that are less risky than average must have a cost of capital that is less than the corporate cost of capital.

True

False

Question 17 1 pts

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0 multiple_choice_question 1360826

Assume that an outstanding seven-year bond has $1,000 par value, a coupon rate of 10 percent, and five years remaining to maturity. If the required rate of return on similar bonds of equal risk is 5 percent, the bond will sell at which of the following?

Assume that an outstanding seven-year bond has $1,000 par value, a coupon rate of 10 percent, and five years remaining to maturity. If the required rate of return on similar bonds of equal risk is 5 percent, the bond will sell at which of the following?

A premium

A discount

At par value

At $500 ($100 annual interest payments x 5 years to maturity)

The bond cannot be sold again because it is already outstanding.

Question 18 1 pts

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0 true_false_question 1360816

Interest rate risk is composed of price risk and reinvestment rate risk. For investors, matching the maturity of the bond to the expected holding period (investment horizon) minimizes interest rate risk.

Interest rate risk is composed of price risk and reinvestment rate risk. For investors, matching the maturity of the bond to the expected holding period (investment horizon) minimizes interest rate risk.

True

False

Question 19 1 pts

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0 true_false_question 1360821

Private, not-for-profit healthcare providers (i.e., those that are not government owned) are legally entitled to issue municipal debt.

Private, not-for-profit healthcare providers (i.e., those that are not government owned) are legally entitled to issue municipal debt.

True

False

Question 20 1 pts

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0 multiple_choice_question 1360830

If debt financing is used in a for-profit corporation, more of a firms operating income is available for distribution to investors (owners and creditors). The additional available operating income arises as a result of

If debt financing is used in a for-profit corporation, more of a firms operating income is available for distribution to investors (owners and creditors). The additional available operating income arises as a result of

greater operating expenses

greater operating revenue

reduced operating expenses

lower dividends

tax savings

Question 21 1 pts

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0 multiple_choice_question 1360831

Which of the following factors influence(s) the estimate of a businesss optimal capital structure?

Which of the following factors influence(s) the estimate of a businesss optimal capital structure?

The amount of business (inherent) risk

Lender/rating agency attitudes

Industry averages

The need to maintain financial flexibility (reserve borrowing capacity)

All of the above

Question 22 1 pts

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0 multiple_choice_question 1360835

Which of the following approaches is (are) not typically used to develop the cost of equity for a large, publicly traded company?

Which of the following approaches is (are) not typically used to develop the cost of equity for a large, publicly traded company?

Capital asset pricing model approach

Discounted cash flow approach

Build-up approach

Debt cost plus risk premium approach

All of the above

Question 23 1 pts

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0 multiple_choice_question 1360815

Gold Coast Health System just paid an annual dividend of $1.50, which is expected to grow at a constant rate of 5 percent per year. If the current required rate of return is 15 percent, what is the value of Gold Coasts stock?

Gold Coast Health System just paid an annual dividend of $1.50, which is expected to grow at a constant rate of 5 percent per year. If the current required rate of return is 15 percent, what is the value of Gold Coasts stock?

$15.75

$15.50

$15.25

$15.00

$14.75

Question 24 1 pts

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0 multiple_choice_question 1360827

The price of an outstanding bond is determined by which of the following?

The price of an outstanding bond is determined by which of the following?

The bonds par value

The bonds coupon rate

The required rate of return on similar bonds

The time to maturity

All of the above

Question 25 1 pts

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0 true_false_question 1360813

Credit enhancement is a system of issuing municipal debt whereby several not-for-profit providers band together to obtain financing as a group; hence, the credit of the lower-rated issuers is enhanced by the superior credit of the higher-rated issuers.

Credit enhancement is a system of issuing municipal debt whereby several not-for-profit providers band together to obtain financing as a group; hence, the credit of the lower-rated issuers is enhanced by the superior credit of the higher-rated issuers.

True

False

Question 26 1 pts

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0 true_false_question 1360812

Municipal bonds are essentially the same as corporate bonds. Thus, the coupon (interest) rate set on a not-for-profit hospital bond will be the same (for all practical purposes) as the rate set on a similar for-profit hospital bond.

Municipal bonds are essentially the same as corporate bonds. Thus, the coupon (interest) rate set on a not-for-profit hospital bond will be the same (for all practical purposes) as the rate set on a similar for-profit hospital bond.

True

False

Question 27 1 pts

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0 multiple_choice_question 1360833

Which of the following statements about the use of debt financing (financial leverage) is incorrect?

Which of the following statements about the use of debt financing (financial leverage) is incorrect?

In most situations, the use of debt financing increases the return to owners (say, as measured by ROE).

In all situations, the use of debt financing increases the riskiness to owners.

Capital structure theory enables managers to precisely determine the optimal capital structure for any for-profit business.

Debt financing allows more of a businesss operating income to flow through to investors.

Because debt financing levers up (increases) owners returns, its use is called financial leverage.

Question 28 1 pts

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0 multiple_choice_question 1360817

Which of the following methods for raising equity capital is not available to not-for-profit corporations?

Which of the following methods for raising equity capital is not available to not-for-profit corporations?

Retained earnings

Government grants

Private contributions

Religious organizations

Common stock sales

Question 29 1 pts

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0 true_false_question 1360824

From the perspective of a firms managers, financing with stock is less risky than financing with debt.

From the perspective of a firms managers, financing with stock is less risky than financing with debt.

True

False

Question 30 1 pts

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0 multiple_choice_question 1360823

Under the constant growth model of stock valuation, the expected value of a stock (i.e., the expected price at the end of the year) is a function of which of the following?

Under the constant growth model of stock valuation, the expected value of a stock (i.e., the expected price at the end of the year) is a function of which of the following?

The most recent dividend, the expected dividend growth rate, and the required rate of return on the stock

The most recent dividend, the expected dividend growth rate, and the expected capital gains yield

The expected dividend growth rate, the required rate of return on the stock, and the expected capital gains yield

The most recent dividend, the expected dividend growth rate, the required rate of return on the stock, and the expected capital gains yield

None of the above