# FIN 571 Wk 2 - Practice: Wk 2 Practice Questions

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# FIN 571 Wk 2 - Practice: Wk 2 Practice Questions

A firm has a debt-to-equity ratio of 1/4. The WACC is 18.6%, and the pretax cost of debt is 9.4%. What is the cost of common equity if the tax rate is 21%?

Multiple Choice

•      19.90%
•      20.90%
•      21.48%
•      22.73%

Changing the capital structure by adding debt will:

Multiple Choice

•      reduce the return that shareholders require.
•      reduce default risk.
•      increase debtholder risk.
•      reduce the cost of debt.

What return on equity do investors expect for a firm with a \$55 share price, an expected dividend of \$4.60, a beta of 0.9, and a constant growth rate of 3.5%?

Multiple Choice

•      9.87%
•      12.48%
•      13.95%
•      11.86%

What would you estimate as the cost of equity if a stock sells for \$40, pays a \$4.25 dividend, and is expected to grow at a constant rate of 5%?

Multiple Choice

•      17.46%
•      14.52%
•      12.69%
•      15.63%

Company X has 2 million shares of common stock outstanding with a book value of \$2 per share. The stock trades for \$3 per share. It also has \$2 million in face value of debt that trades at 90% of face value. What is the debt ratio that should be used to calculate WACC?

Multiple Choice

•      13.91%
•      23.08%
•      31.03%
•      27.67%

Which one of the following statements is in?

Multiple Choice

•      The equity component of WACC reflects the return expected by the company’s shareholders.
•      Market values should be used in calculating WACC.
•      Preferred equity is a separate component of WACC.
•      There is a tax shield on the equity dividends paid.

The company cost of capital:

Multiple Choice

•      measures the return that investors require from the company.
•      depends on current profits and cash flows.
•      is measured using security book values.
•      depends on historical profits and cash flows.
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