IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 771:

  What s the weighted average cost of capital for a firm with equal amounts of debt and equity financing, a 15% before-tax company cost of equity capital, a 35% tax rate, and a 12% coupon rate on its debt that is selling at par value?

  A. 8.775%

  B. 9.60%

  C. 11.40% D 13.50%

  Correct Answer: C

  The 12% debt coupon rate is reduced by the 35% tax shield, resulting in a cost of debt of 78% [12% x (1 -.35)1 The average of the 15% equity capital and 7.8% debt is 11.4%

• Question 772:

  A firm's new financing will be in proportion to the market value of its current financing shown below

  

  The firm's bonds are currently selling at 80% of par, generating a current market yield of 9%, and the corporation has a 40% tax rate. The preferred stock is selling at its par value and pays a 6% dividend. The common stock has a current market value of $40 and is expected to pay a $1 20 per share dividend this fiscal year. Dividend growth is expected to be 10% per year, and flotation costs are negligible. The firm's weighted-average cost of capital is (round calculations to tenths of a percent)

  A. 130%

  B. 83%

  C. 9.6%

  D. 9.0%

  Correct Answer: C

• Question 773:

  What is the weighted average cost of capital for a firm using 65% common equity with a return of 15%. 25% debt with a return of 6%. 10% preferred stock with a return of 10%. and a tax rate of 35%?

  A. 10.333%

  B. 11275%

  C. 11325%

  D. 12.250%

  Correct Answer: C

• Question 774:

  The common stock of the Nicolas Corporation is currently selling at $80 per share. The leadership of the company intends to pay a $4 per share dividend next year With the expectation that the dividend will grow at 5% perpetually, what will the markets required return on investment be for Nicolas common stock'?

  A. 5%

  B. 6. 5.25%

  C. 7.5%

  D. 10%

  Correct Answer: D

  The dividend growth model estimates the cost of retained earnings using the dividends per share, the expected growth rate, and the market price. The current dividend yield is 5% ($4 + $80) Adding the growth rate of 5% to the yield o15% results in a required return of 10%.

• Question 775:

  The before-tax cost of DQZ's planned debt financing, net of flotation costs, in the first year is

  A. 11.80%

  B. 8.08%

  C. 10.00%

  D. 7.92%

  Correct Answer: B

• Question 776:

  Assume that the after-tax cost of debt is 7% and the cost of equity is 12%. Determine the weighted-average cost of capital to DQZ.

  A. 10.50%

  B. 850%

  C. 950%

  D. 6.30%

  Correct Answer: A

  The 7% debt cost and the 12% equity cost should be weighted by the proportions of the total investment represented by each source of capital. The total project costs $50 million, of which debt is $15 million, or 30% of the total. Equity capital is the other 70%,. Consequently, the weighted-average cost of capital is 10.5% [(7%)(30%) + (12%)(70%)].

• Question 777:

  The difference between the required rate of return on a given risky investment and that on a risk less investment with the same expected return is the

  A. Risk premium.

  B. Coefficient of variation.

  C. Standard deviation.

  D. Beta coefficient.

  Correct Answer: A

  The required rate of return on equity capital in the capital asset pricing model is me risk- free rate (determined by government securities) plus the product of the market risk premium times the beta coefficient (beta measures the firm's risk). The market risk premium is the amount above the risk-free rate that will induce investment in the market. The beta coefficient of an individual stock is the correlation between the volatility (price variation) of the stock market and that of the price of the individual stock,

• Question 778:

  If Williams, Inc. needs a total of $1,000,000. the firm's weighted-average cost of capital would be

  A. 6.8%

  B. 4.8%

  C. 6.5%

  D. 27.4%

  Correct Answer: A

  The cost of the bonds is given as 4.8%. The cost of the preferred stock is 8% ($8 dividend + $100). the

  cost of new common stock is 7.6% ($7 dividend ` $92 proceeds), and the cost of the retained earnings is

  7% ($7 dividend ?$100 market price). These four costs are then weighted by the preferred capital structure

  ratios, a process that requires subdividing the common stock portion into retained earnings of $100.000

  (10% of capital) and new common stock of $400 000 (40% of capital):

  30%x4.8% = 1.44%

  20% x 8.0% = 1.60%

  40%x7.6% = 3.04%

  10% x 7.0% .= .70%

  Total 678%

  Rounding to the nearest tenth results in the correct answer of 6.8%. DQZ Telecom is considering a project

  for the coming year that will cost $50 million. DQZ plans to use the following combination of debt and

  equity to finance the investment.

  Issue $15 million of 20-year bonds at price of $101 , with a coupon rate of 8%, and flotation costs of 2% of

  par

  Use $35 million of funds generated from earnings.

  The equity market is expected to earn 12%. U.S. Treasury bonds are currently yielding 5%. The beta

  coefficient for DQZ Es estimated to be .60. DOZ is subject to an effective corporate income tax rate of 40%

  .

• Question 779:

  The cost of funds from retained earnings for Williams, Inc. is

  A. 7.0%

  B. 7.6%

  C. 7.4%

  D. 8.1%

  Correct Answer: A

• Question 780:

  If Williams, Inc. needs a total of $200,000. the firm's weighted-average cost of capital would be

  A. 19.8%

  B. 4.8%

  C. 6.5%

  D. 6.8%

  Correct Answer: C

  Williams' preferred capital structure is 50% common stock. However, $ 100.000 of retained earnings (50% of the required $200,000 of capital) will be used before any common stock is issued. Thus, the weighted-average cost of capital will be determined based on the respective costs of the bonds, preferred stock. and retained earnings. The cost of the bonds is given as 4.8%, the cost of the preferred stock is 8%, and the cost of the retained earnings is 7% ($7 dividend -- $100 market price of the common stock). These three costs are then weighted by the preferred capital structure ratios: 30%x4.8% 1.44% 20% x 8.0% 1.60% 50% x 7.0% 3.50% Total 6.54% Rounding to the nearest tenth produces the correct answer of 6.5%. Williams, Inc. is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described as follows, the company can sell unlimited amounts of all instruments. Williams can raise cash by selling $1,000, 8%. 20- year bonds with annual interest payments. In selling the issue, an average premium of $30 per bond would be received, and the firm must pay flotation costs of $30 per bond. The after-tax cost of funds is estimated to be 4.8%. Williams can sell $8 preferred stock at par value, $105 per share. The cost of issuing and selling the preferred stock is expected to be $5 per share. Williams' common stock is currently selling for $100 per share. The firm expects to pay cash dividends of $7 per share next year, and the dividends are expected to remain constant. The stock will have to be under priced by $3 per share, and flotation costs are expected to amount to $5 per share. Williams expects to have available $100,000 of retained earnings in the coming year, once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing. Williams' preferred capital structure is Long-term debt 30% Preferred stock 20% Common stock 50%