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Question

  1. A firm’s cost of debt can best be estimated:

 

            a) by adding a risk premium to the coupon rate.

            b) using the yield-to-maturity on newly issued debt of other firms.

            c) using the firm’s borrowing rate on short-term loans.

            d) using the yield-to-maturity on the firm’s outstanding debt.

 

 

 

  1. Laurentide Union Bank is expected to pay a dividend of $4.20 per share in one year. The dividend is expected to grow at a rate of 5 percent forever. If the current market price for a share of Laurentide Union Bank is $40, what is the cost of equity?

 

            a) 5.00%

            b) 9.52%

            c) 10.50%

            d) 15.50%

 

 

  1. The Third Cup Company has just paid a dividend of $3 per share. The dividends are expected to grow at a rate of 4 percent per year forever. The current stock price is $25 per share. The firm faces a tax rate of 40 percent and flotation costs of 5 percent on new stock issues. The cost of equity for internal funds is:

 

a) 9.89%

b) 10.12%

c) 16.48%

d) 16.87%

 

 

  1. Capital expenditures are

 

a) a firm’s investments in net working capital.

b) a firm’s investments in long-lived tangible and non-tangible assets.

c) a firm’s investments in financial securities.

d) all of the above.

 

 

 

  1. The risk-adjusted discount rate is:

 

a) the overall company expected return for investors

b) the debt rate of the company

c) the cost of financing from the bank

d) the discount rate that reflects the project’s risk

 

Asked By SunlitPathways41 at

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Ricky

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Step 1/2

The correct option is:

d) using the yield-to-maturity on the firm’s outstanding debt.

Explanation:

The cost of debt for a firm is best estimated by looking at the yield-to-maturity (YTM) on its existing, outstanding debt. This is because the YTM reflects the market's current assessment of the risk and the time value of money for that particular issuer's debt. The YTM takes into account not just the coupon payments but also the price at which the bond is currently trading, and the time until maturity.

Step 2/2

The other options are incorrect:

Explanation:

Final Answer

The correct option is:

d) using the yield-to-maturity on the firm’s outstanding debt.

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