Question 29 \"As the need for capital increases beyond the optimum capital struc

Question

Question 29

"As the need for capital increases beyond the optimum capital structure, the cost of debt financing will ________, ________ the firm's weighted average cost of capital."

increase; lowering

increase; raising

decrease; lowering

decrease; raising

2 points   

Question 30

The firm's cost of preferred stock is ________. (See Table)

The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.

Source of

Capital

Target Capital

Proportions

7.2 percent

8.3 percent

13.3 percent

13.9 percent

2 points   

Question 31

What is the yield to maturity, to the nearest percent, for the following bond: current price is $908, coupon rate is 11 percent, $1,000 par value, interest paid annually, eight years to maturity?

13%

14%

11%

12%

2 points   

Question 32

A group formed by an investment banker to share the financial risk associated with underwriting new securities is called a(n) ________.

underwriting syndicate

investment banking consortium

broker pool

selling group

2 points   

Question 33

As risk aversion increases ________.

investors' required rate of return will increase

a firm's beta will remain neutral

a firm's beta will decrease

investors' required rate of return will remain unchanged

2 points   

Question 34

A(n) ________ in the beta coefficient normally causes ________ in the required return and therefore ________ in the price of the stock, everything else remaining the same.

increase; an increase; a decrease

decrease; a decrease; a decrease

increase; a decrease; an increase

increase; an increase; an increase

increase; lowering

increase; raising

decrease; lowering

decrease; raising

Explanation / Answer

29. Correct option increase; raising

As the need for capital increases beyond the optimum capital structure, the cost of debt financing will Increase because there is a risk of non payment of interest and principal to debentureholders.

Increase in cost of debt in turn increases WACC

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