Reference no: EM132348560

1. Rollins Corporation is constructing its marginal cost of capital (MCC) schedule. Its target capital structure is 30 percent debt, 20 percent preferred stock, and 50 percent common equity. Its bonds have a 12 percent coupon rate of interest, semiannual interest payments, a current maturity of 20 years, and a market value equal to their par value of $1,000. The firm's marginal tax rate is 40 percent. What is Rollins' after-tax cost of debt?

a. 7.2%

b. 12.0%

c. 8.4%

d. 3.6%

e. 4.8%

2. Alpha Inc.'s beta coefficient is 1.2, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Based on the capital asset pricing model (CAPM), what should be Alpha's cost of retained earnings?

a. 18%

b. 11%

c. 17%

d. 16%

e. 12%

3. Super Solutions Inc. just paid a dividend equal to $3.00 per share. Its stock sells for $33.00 per share, it is growing at an annual rate equal to 6 percent, which is expected to continue long into the future. What is Super's cost of retained earnings?

a. 9.64%

b. 15.09%

c. 14.58%

d. 9.09%

e. 15.64%

4. All else equal, a regular stock split:

a. increases the dividend per share paid by a firm.

b. reduces the profits earned by a firm.

c. results in a significant increase in the per share price of the stock.

d. should not be recognized on the firm's financial statements.

e. increases the number of shares of stock outstanding.

5. Which of the following capital budgeting techniques makes the assumption that the project's cash flows are reinvested at the firms required rate of return?

a. discounted rate of return

b. traditional payback period (PB)

c. internal rate of return (IRR)

d. discounted payback period (DPB)

e. net present value (NPV)

6. The annual growth of Omega Inc's operations fluctuates substantially. As a result, using the dividend discount model (DDM) to estimate Omega's cost of retained earnings, rs, is difficult because:

a. the market price of its common stock is very volatile.

b. its net income is difficult to compute.

c. the stock's dividend yield is extremely difficult to estimate.

d. its growth rate (g) is not stable, which makes it difficult to estimate.

e. the firm's growth rate might be negative for an extended period of time.