Question 1: A firm has $25 million in assets and its optimal capital structure is 60% equity. If the firm has $18 million in retained earnings, at what asset level will the firm need to issue stock? (Assume no growth in retained earnings.)
a. The firm should have already issued additional stock.
b. The firm can increase assets to $30 million.
c. The firm can increase assets to $41.67 million.
d. There is insufficient information to determine an answer.
Question 2: Using the constant growth model, a firm's expected dividend yield is 3% of the stock price, and it's growth rate is 7%. If the tax rate is 35% what is the firm's cost of equity?
a. 10%
b. 6.65%
c. 8.95%
d. More information is required.
Question 3: A firm's stock is selling for $78. The next annual dividend is expected to be $2.70. The growth rate is 9%. The flotation cost is $5.00. What is the cost of retained earnings?
a. 13.09%
b. 12.46%
c. 12.75%
d. none of the above
Question 4: For many firms, the cheapest and most important source of equity capital is in the form of
a. debt
b. common stock
c. preferred stock
d. retained earnings
Question 5: Marginal cost of capital
a. recognizes that cost of capital does not stay constant as more funds are raised.
b. usually provides the same capital budgeting choices as the use of weighted average cost of capital.
c. can be defined as the cost of capital when no retained earnings are available for expansion.
d. none of the above apply.