1. Which of the following statements is correct?
A. A mature firm will have a higher cost of capital than a firm in the growth phase.
B. A mature firm will have a higher dividend yield than a firm in the growth phase.
C. A mature firm will have a higher capital gains growth than a firm in the growth phase.
D. Both B and C are correct.
2. Which of the following methods to estimate the cost of capital for equity capital will lead to the highest estimate?
A. DCF.
B. CAPM.
C. Bond Yield plus Risk Premium.
D. Can not tell from the information provided.
3. Which of the following is a problem when using the CAPM to estimate the cost of capital for equity?
A. The risk-free rate of return fluctuates.
B. The market return fluctuates.
C. The beta fluctuates.
D. The beta is calculated using historical data.
4. Let’s suppose that a firm issues two tranches (“series”) of bonds, in addition to preferred stock and retained earnings. It has so much retained earnings that it does not have to issue new equity. However, the two different tranches have different flotation costs. How does one calculate the breakpoint for the resulting two WACC’s?
A. Dollar amount of lower cost tranche divided by the We.
B. Dollar amount of lower cost tranche divided by the Wd.
C. Dollar amount of higher cost tranche divided by the Wd.
D. There will not be a breakpoint since there will only be one WACC.
5. If the rate of return for preferred stock goes up, for example because the market has become more risky, the price of preferred stock goes down.
True/False
6. Due to flotation costs the WACC with retained earnings included is lower than the WACC with newly issued stock included.
True/False