IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 761:

  A firm's target or optimal capital structure is consistent with which one of the following?

  A. Maximum earnings per share,

  B. Minimum cost of debt.

  C. Minimum risk.

  D. Minimum weighted-average cost of capital

  Correct Answer: D

  Ideally a firm will have a capital structure that minimizes its weighted-average cost of capital This requires a balancing of both debt and equity capital and their associated risk levels.

• Question 762:

  By using the dividend growth model, estimate the cost of equity capital for a firm with a stock price of $30 00, an estimated dividend at the end of the first year of $300 per share, and an expected growth rate of 10%.

  A. 21.1%

  B. 122%

  C. 110%

  D. 200%

  Correct Answer: D

  Under the dividend growth model, the cost of equity equals the expected growth rate plus the quotient of the next dividend and the current market price. Thus the cost of equity capital is 20% [10% + ($3 + 11$30)].This model assumes that the payout ratio, retention rate, and the earnings per share growth rate are all constant.

• Question 763:

  Acme Corporation is selling $25 million of cumulative, non-participating preferred stock. The issue will have a par value of $65 per share with a dividend rate of 6%.The issue will be sold to investors for $68 per share, and issuance costs will be $4 per share The cost of preferred stock to Acme is

  A. 5.42%.

  B. 5.74%.

  C. 6.00%.

  D. 6.09%.

  Correct Answer: D

  The company will receive the use of on $64 per share. The annual dividend requirement is 6% of $65, or $390 per share. Dividing the $3.90 by the $64 received results in a financing cost of 6.09%.

• Question 764:

  Maylar Corporation has sold $50 million of $1 .000 par value, 12% coupon bonds The bonds were sold at a discount and the corporation received $985 per bond. If the corporate tax rate is 40%. the after-tax cost of

  these bonds for the first year (rounded to the nearest hundredth percent) is

  A. 7.31%.

  B. 4.87%.

  C. 12.00%.

  D. 7.09%.

  Correct Answer: A

  Interest is 12%, and the annual interest payment on one bond is $120.Thus the effective rate is 12.18% ($120 $985).Reducing this rate by the 40% tax savings lowers the cost to 7.31%.

• Question 765:

  Which one of a firms sources of new capital usually has the lowest after-tax cost?

  A. Retained earnings.

  B. Bonds.

  C. Preferred stock.

  D. Common stock.

  Correct Answer: B

  Debt financing, such as bonds, normally' has a lower after-tax cost than does equity financing. The interest on debt is tax deductible. whereas the dividends on equity are not. Also, bonds are slightly less risky than stock because the bond holders have a first right to assets at liquidation

• Question 766:

  Hi-Tech, Inc. has determined that it can minimize its weighted average cost of capital (WACC) by using a debt-equity ratio of 213. If the firm's cost of debt is 9% before taxes, me cost of equity is estimated to be 12% before taxes, and the tax rate is 40%. what is the firm's WACC?

  A. 6.48%

  B. 7.92%

  C. 9.36%

  D. 1080%

  Correct Answer: C

• Question 767:

  Enert, Inc.'s current capital structure is shown below. This structure is optimal, and the company wishes to maintain it. Debt 25% Preferred equity 5 Common equity 7 0

  Enert's management is planning to build a $75 million facility that will be financed according to this desired capital structure. Currently, $15 million of cash is available for capital expansion. The percentage of the $75 million that will come from a new issue of common stock is

  A. 52.50%.

  B. 50.00%.

  C. 7000%.

  D. 5600%.

  Correct Answer: D

  Because $15 million is already available, the company must finance $60 million ($75 million -- $15 million).Of this amount, 70%, or $42 million, should come from the issuance of common stock to maintain the current capital structure. The $42 million represents 56% of the total $75 million.

• Question 768:

  If k is the cost of debt and t is the marginal tax rate, the after-tax cost of debt. kk, is best represented by the formula

  A. ki = k /t

  B. ki=k/ .(1--t)

  C. ki=k(t)

  D. kj=k(1--t)

  Correct Answer: D

  The after-tax cost of debt is the cost of debt times the quantity one minus the tax rate. For example, the after-tax cost of a 10% bond is 7% [10% x (1 -- 30%)] if the tax rate is 30%.

• Question 769:

  What is the weighted average cost of capital for a firm with 40% debt. 20% preferred stock, and 40% common equity if the respective costs for these components are 8% after- tax, 13% after-tax, and 17% before-tax'? The firm's tax rate is 35%

  A. 1022%

  B. 10.52%

  C. 1148%

  D. 1260%

  Correct Answer: D

• Question 770:

  What is the after-tax cost of preferred stock that sells for $5 per share and offers a $0.75 dividend when the tax rate is 35%?

  A. 5.25%

  B. 9.75%

  C. 10.50%

  D. 15%

  Correct Answer: D