Question

True or false: The cost of capital is the investor’s cost in the form of interest payments and dividends.

True or false: Total common equity is the difference between retained earnings and paid in capital.

True or false: Debt may be more advantageous than equity because equity can improve the company’s financial position as measured by various analytical ratios.

True or false: The weighted average is the sum of the W × R products.

True or false: If company FGH has three loans, $600,000 at 3%; $800,000 at 4%; and $1,500,000 at 8%, the weighted average of the loans is 5.8%.

True or false: When using the WACC formula to determine the capital costs of a new project, you can compare it to ROIC to determine whether the return will be sufficient to pay for the capital.

True or false: The value of common stock is more stable than preferred stock because the dividends are normally a fixed amount every year.

True or false: Firms use capital for expansion.

True or false: There are three sources of capital.

True or false: The value that certain kinds of dividends are calculated on is referred to as a par value.

Answer 1

The cost of capital is the investor’s cost in the form of interest payments and dividends : TRUE

Total common equity is the difference between retained earnings and paid in capital: FALSE, it is the sum of retained earnings and paid in capital

Debt may be more advantageous than equity because equity can improve the company’s financial position as measured by various analytical ratios: FALSE
The weighted average is the sum of the W × R products: TRUE

If company FGH has three loans, $600,000 at 3%; $800,000 at 4%; and $1,500,000 at 8%, the weighted average of the loans is 5.8% TRUE , It is 3%*600,000/2,900,000 + 4%*800,000/2,900,000 + 8%*1,500,000/2,900,000 = 5.8%

When using the WACC formula to determine the capital costs of a new project, you can compare it to ROIC to determine whether the return will be sufficient to pay for the capital: TRUE

The value of common stock is more stable than preferred stock because the dividends are normally a fixed amount every year: FALSE, dividend on common equity are not fixed

Firms use capital for expansion: TRUE

There are three sources of capital: FALSE, there are two : debt and equity

The value that certain kinds of dividends are calculated on is referred to as a par value: TRUE