financial management
Assignment Chapter 10
True/False
Indicate whether the statement is true or false.
True 1. "Capital" is sometimes defined as the funds supplied by investors.
True 2. The cost of capital should reflect the average cost of the various sources of long-term funds a firm uses to acquire assets.
True 3. The component costs of capital are market-determined variables in the sense that they are based on investors' required returns.
False 4. The before-tax cost of debt, which is lower than the after-tax cost, is used as the component cost of debt for purposes of developing the firm's WACC.
False 5. The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt.
False 6. The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends received by a corporation may be excluded from the receiving corporation's taxable income.
True 7. The cost of common stock is the rate of return the marginal stockholder requires on the firm's common stock.
False 8. For capital budgeting and cost of capital purposes, the firm should always consider retained earnings as the first source of capital, i.e., use these funds first, because retained earnings have no cost to the firm.
False 9. Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them, and no flotation costs are required to raise them, but capital raised by selling new stock or bonds does have a cost.
False 10. The cost of equity raised by retaining earnings can be less than, equal to, or greater than the cost of external equity raised by selling new issues of common stock, depending on tax rates, flotation costs, the attitude of investors, and other factors.
False 11. The firm's cost of external equity raised by issuing new stock is the same as the required rate of return on the firm's outstanding common stock.
False 12.
True/False
Indicate whether the statement is true or false.
True 1. "Capital" is sometimes defined as the funds supplied by investors.
True 2. The cost of capital should reflect the average cost of the various sources of long-term funds a firm uses to acquire assets.
True 3. The component costs of capital are market-determined variables in the sense that they are based on investors' required returns.
False 4. The before-tax cost of debt, which is lower than the after-tax cost, is used as the component cost of debt for purposes of developing the firm's WACC.
False 5. The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt.
False 6. The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends received by a corporation may be excluded from the receiving corporation's taxable income.
True 7. The cost of common stock is the rate of return the marginal stockholder requires on the firm's common stock.
False 8. For capital budgeting and cost of capital purposes, the firm should always consider retained earnings as the first source of capital, i.e., use these funds first, because retained earnings have no cost to the firm.
False 9. Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them, and no flotation costs are required to raise them, but capital raised by selling new stock or bonds does have a cost.
False 10. The cost of equity raised by retaining earnings can be less than, equal to, or greater than the cost of external equity raised by selling new issues of common stock, depending on tax rates, flotation costs, the attitude of investors, and other factors.
False 11. The firm's cost of external equity raised by issuing new stock is the same as the required rate of return on the firm's outstanding common stock.
False 12.