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

2. The flotation costs of issuing new securities

3. If the net present values of two mutually exclusive investments are positive, a firm

should select

4. Which of the following statements about the cost of debt is correct?

5. The internal rate of return and net present value methods of capital budgeting assume that the cash flows are reinvested at the

6. The optimal capital structure involves

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 (D ) = $6

0

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 the market = 12 percent Beta = 1.2

7. According to the information provided in the table, what is the cost of debt?

8. According to the information in the table, what is the cost of preferred stock?

9. According to the information in the table, what is the cost of equity using the capital asset pricing model (CAPM)?

10. According to the information in the table, what is the cost of equity using the bond yield plus risk premium method?

11. According to the information in the table, what is the cost of equity using the expected growth method?

12. A firm should make an investment if the present value of the cash inflows on the investment is

13. Which of the following statements about retained earnings is correct?

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 $1,800 $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

15. According to the information in the table, the NPV for Investment B is

16. Based on the information in the table, if the investments are mutually exclusive, the firm should select

17. Based on the information in the table, if the investments are independent, the firm should select

18. A firm should reject an investment if the internal rate of return (IRR) on the investment is

19. The net present value of an investment will be higher if

20. Which of the following statements about the marginal cost of capital is correct?

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