Cost of Capital MCQ Quiz

What is the purpose of calculating the Weighted Average Cost of Capital (WACC)?

• To calculate dividends for common stockholders

• To measure the company's debt level

• To determine the average cost of financing a project

• To reduce tax liability

Which component of WACC is tax-adjusted and why?

• Cost of preferred stock, because it is not deductible

• Cost of common equity, because dividends are taxable

• Cost of debt, because interest is tax-deductible

• Cost of new equity, because of flotation costs

A company has a cost of debt of 10% and a tax rate of 40%. What is the after-tax cost of debt?

• 6%

• 4%

• 10%

• 8%

Which of the following is NOT a component of the WACC formula?

• Flotation cost

• Cost of debt

• Cost of preferred stock

• Cost of equity

What is the formula for the cost of preferred stock (rp)?

• rp = D1 / P0 + g

• rp = Dp / Pp

• rp = rd + RP

• rp = WACC × (1 - T)

Given D0 = $4.19, P0 = $50, and g = 5%, what is the cost of equity (rs) using the DCF method?

• 12.8%

• 14.0%

• 13.8%

• 10.0%

Why is the cost of retained earnings usually lower than the cost of new equity?

• Retained earnings require no dividend payment

• Retained earnings are tax-deductible

• There are no flotation costs for retained earnings

• It is not included in the WACC

If a firm has ROE of 15% and a retention ratio of 35%, what is the expected growth rate (g)?

• 6.0%

• 5.25%

• 7.5%

• 3.5%

Why is preferred stock considered riskier than debt to investors?

• Dividends are not paid before taxes

• Firms are not obligated to pay preferred dividends

• Preferred stock is not tradable

• It always has higher returns than debt

What is the estimated WACC if: wd = 30%, rd = 10%, T = 40%, wp = 10%, rp = 9%, wc = 60%, rs = 14%?

• 12.5%

• 10.0%

• 11.1%

• 13.2%