Question

All of the following are sources of capital for firms except:

Question 1 options:

	personal loans from shareholders
	issuing common shares
	issuing debt
	issuing preferred shares

Question 2 (1 point)

Saved

Firms with risky projects typically have a higher weighted average cost of capital (WACC) than firms with low risk projects.

Question 2 options:

	True
	False

Question 3 (1 point)

Saved

One of the things that makes issuing debt expensive is that the interest is not tax deductible.

Question 3 options:

	True
	False

Question 4 (2 points)

Generally speaking, if interest rates don't change and a firm's tax bracket increases, the cost of issuing new debt __________________

Question 4 options:

	decreases
	increases
	remains the same
	need more information

Question 5 (2 points)

You've run the numbers and your company's weighted average cost of capital (WACC) is 6.75%. If your company has unlimited funds, which project do you accept below?

Question 5 options:

	Building a new pipeline facility that has an expected return of 10.25%
	Buying your competitor, which would bring an expected return of 6.50%
	Hiring more sales people, which would result in a return of 6.75%
	None of the above

Question 6 (1 point)

The least expensive way for a company to raise funds is by issuing common shares of stock.

Question 6 options:

	True
	False

Question 7 (2 points)

When the acceptance of one project eliminates another project, it is called ________________________ (hint: go to Zoom and listen)

Question 7 options:

	mutually exclusive projects
	independent projects
	indexing
	dollar cost averaging

Question 8 (5 points)

The Ola Nacho Factory is in the 40% tax bracket. If they can issue $1,000 ten-year bonds that pay $70 annually and have a present value of $985, what is the after tax cost of issuing new debt?

Question 9 (2 points)

One big advantage to issuing debt for a firm is that ______________________

Question 9 options:

	the interest is paid to common shareholders, so they are the ones who are taxed, not the business
	the interest on the debt is added back as earnings
	the interest on the debt is taxed at the personal level only
	the interest on the debt is tax deductible

Question 10 (2 points)

The Ola Nacho Company can issue new debt (bonds) that carry a rate of 5.65%. If the company is in the 40% tax bracket, what is the after tax cost of debt?

Question 10 options:

	2.26%
	226%
	3.39%
	33.9%

Question 11 (2 points)

__________________ is an example of debt.

Question 11 options:

	Notes payable
	Retained earnings
	Notes receivable
	New common stock

Question 12 (5 points)

The Ola Nacho Factory can issue preferred shares of stock that pay a dividend of $2.75 annually. If they can issue new shares at $39.25 per share, what is the cost of issuing new preferred shares of stock?

Question 13 (2 points)

An advantage of owning preferred shares of stock is that __________________________

Question 13 options:

	they can be converted to debt
	the dividend is paid out before any dividend is paid to common shareholders
	they carry additional voting rights the are greater than common shares
	the dividend payment to preferred shareholders is tax deductible

Question 14 (2 points)

The Ola Nacho Company would like to raise capital by issuing common shares of stock. If the investment bank charges a $2 per share underwriting (flotation) fee and they can issue common shares at $35.50 per share when the dividend is $3.30 per share, what is the cost of issuing new common shares?

Question 14 options:

	10%
	5.6%
	9.3%
	8.8%

Question 15 (10 points)

The Ola Nacho Factory has a capital structure of 15% debt, 50% preferred shares, and 35% common stock. If there after tax cost of debt is 5%, the cost of preferred shares is 7%, and the cost of common stock is 10%, what is the weighted average cost of capital?

Question 16 (5 points)

The Ola Nacho Factory can issue common shares of stock that pay a $1.95 dividend at $19.50 per share. If the underwriting fee is $1.50 per share, what is the cost of issuing common stock?

Question 17 (2 points)

The Ola Nacho Corporation is considering issuing new preferred shares of stock. If they can issue the new stock at $24.50 per share and the stock pays a $3.75 annual dividend, what is the cost of issuing preferred shares?

Question 17 options:

	6.53%
	1.53%
	65.3%
	15.3%

Multiple choice

Please answer each question based upon our discussions, your notes, the Cengage materials, our zoom calls, and the Power Points. Each question is worth two points.

Question 18 (1 point)

One benefit of preferred shares is that they pay a consistent dividend before any retained earnings are distributed to common shareholders.

Question 18 options:

	True
	False

Question 19 (1 point)

The fee an investment bank charges a company to underwrite new shares of stock is called a 'flotation' cost.

Question 19 options:

	True
	False

Answer 1

1.All the given options are sources of capital except personal loan from shareholders

Explanation :- Company has majorly three sources of capital namely Debt in which interest is tax deductible ,second is preference shares on which fixed dividend is paid but dividend is not tax deductible and the last one is common shares which represents ownership in the firm and are repaid in the last at the time of bankruptcy or liquidation

2.True

Explanation:- When risk is higher then investors will require higher compensation for risk and therefore weighted average cost of capital will be higher

3.False

Explanation :- When debt is issued by firm then the interest payable on debt is tax deductible which infact makes debt less expensive

4.Decreases

Explanation :-Cost of debt to firm =Interest rate (1-tax rate).Therefore we can see from above formula that when tax bracket increases then cost of debt will be lower .Hence we can say when tax bracket increases then cost of debt Decreases