Missouri Southern State University

ECON 350

Financial Management

Chapter 9 Quiz

1)The                                 is the rate of return a firm must earn on its investments in projects in order to maintain the market value of its stock.

1. 1. net present value

B) cost of capital

3. internal rate of return
4. gross profit margin

2. The four basic sources of long-term funds for the business firm are
   1. current liabilities, long-term debt, common stock, and preferred stock.
   2. current liabilities, long-term debt, common stock, and retained earnings.
   3. long-term debt, paid-in capital in excess of par, common stock, and retained earnings.

D) long-term debt, common stock, preferred stock, and retained earnings.

3. The firm's optimal mix of debt and equity is called its
   1. optimal ratio.

B) target capital structure.

3. maximum wealth.
4. maximum book value.

4. A tax adjustment must be made in determining the cost of                    .

A) long-term debt

2. common stock
3. preferred stock
4. retained earnings

5. The before-tax cost of debt for a firm which has a 40 percent marginal tax rate is 12 percent. The after-tax cost of debt is
   1. 4.8 percent.
   2. 6.0 percent.

C) 7.2 percent.

D) 12 percent.

6. A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost of issuing and selling

the stock was $2 per share. The firm's marginal tax rate is 40 percent. The cost of the preferred stock is

1. 1. 3.9 percent.
   2. 6.1 percent.
   3. 9.8 percent.

D) 10.2 percent.

7. When determining the after-tax cost of a bond, the face value of the issue must be adjusted to the net proceeds amount by considering
   1. the risk.

B) the flotation costs.

3. the approximate returns.
4. the taxes.

8. The cost of new common stock financing is higher than the cost of retained earnings due to

A) flotation costs and underpricing.

2. flotation costs and overpricing.
3. flotation costs and commission costs.
4. commission costs and overpricing.

9. A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5 percent. The cost of the firm's common stock equity is
   1. 5 percent.
   2. 8 percent.
   3. 10 percent.

D) 13 percent.

10. Weighing schemes for calculating the weighted average cost of capital include all of the following EXCEPT
    1. book value weights.

B) optimal value weights.

3. market value weights.
4. target weights.