IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 781:

  The cost of funds from the sale of common stock for Williams. Inc. is

  A. 7.0%

  B. 7.6%

  C. 7,4%

  D. 8.1%

  Correct Answer: B

• Question 782:

  Global Company Press has $150 par value preferred stock with a market price of $120 a share, The organization pays a $15 per share annual dividend. Global's current marginal tax rate is 40%. Looking to the future, the company anticipates maintaining its current capital structure. What is the component cost of preferred stock to Global?

  A. 4

  B. 5%

  C. 10%

  D. 125%

  Correct Answer: D

  The cost of preferred stock is the preferred dividend divided by the price. No tax adjustment is necessary because dividends are not deductible. If the market price is $120 when the dividend is $15, the cost of preferred capital is 12.5% ($15+ $120). 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%

• Question 783:

  Without prejudice to your answers from any other questions, assume that the after-tax cost of debt financing is 10%. the cost of retained earnings is 14%. and the cost of new common stock is 16%. What is the marginal cost of capital to - FLF Corporation for any projected capital expansion in excess of $7 million?

  A. 10%

  B. 12.74%

  C. 136%

  D. 16%

  Correct Answer: C

  For this calculation, the weighted-average cost of capital is based on the 16% cost of new common stock and the 10% cost of debt, Retained earnings will not be considered because the amount available has been exhausted. Thus, the weighted average of any additional capital required will be 13.6% [(60% x 16% cost of new equity) + (40% x 10% cost of new debt].

• Question 784:

  Without prejudice to your answers from any other questions, assume that the after-tax cost of debt financing is 10%, the cost of retained earnings is 14%, and the cost of new common stock is 16%. If capital expansion needs to be $7 million for the coming year, what is the after-tax weighted-average cost of capital to FLF Corporation?

  A. 11 14%

  B. 1274%

  C. 13.6%

  D. 16%

  Correct Answer: B

  To maintain a capital structure of 40% debt and 60% equity, the $7 million total must consist of $2.8 million

  of debt and $4.2 million of equity. The equity will consist of $3 million of retained earnings and $1.2 million

  of new stock. The weighted-average cost of the three sources of new capital is determined as follows:

  $3,000000 + $7000,000 x 14% = 6.00%

  $1,200,000 $7,000,000 x 16% = 214%

  $2,800,000 + $7,000,000 x 10% = 4.00%

  12.74%

  The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because

  the firm employs discounted cash flow methods, the cost of capital for the firm must be estimated. The

  following information for FLF Corporation is provided:

• Question 785:

  The cost of using FLF Corporation retained earnings for financing is

  A. 5%

  B. 9%

  C. 10%

  D. 15%

  Correct Answer: D

• Question 786:

  The maximum capital expansion that FLF Corporation can support in the coming year without resorting to external equity financing is

  A. $2 million.

  B. $3 million.

  C. $5 million.

  D. Cannot determine from the information given.

  Correct Answer: C

• Question 787:

  The after-tax cost to FLF Corporation of the new bond issue is

  A. 4%

  B. 6%

  C. 10%

  D. 14%

  Correct Answer: B

• Question 788:

  If FLF Corporation must assume a 20% flotation cost on new stock issuances. what is the cost of new common stock'?

  A. 6.25%

  B. 15%

  C. 16.25%

  D. 10%

  Correct Answer: C

• Question 789:

  In referring to the graph of a firm's cost of capital, if e is the current position, which one of the following statements best explains the saucer or U-shaped curve'?

  

  A. The composition of debt and equity does not affect the firm's cost of capital.

  B. The cost of capital is almost always favorably influenced by increases in financial leverage.

  C. The cost of capital is almost always negatively influenced by increases in financial leverage.

  D. Use of at least some debt financing will enhance the value of the firm.

  Correct Answer: D

• Question 790:

  Osgood Products has announced that it plans to finance future investments so that the firm will achieve an optimum capital structure. Which one of the following corporate objectives is consistent with this announcement?

  A. Maximize earnings per share.

  B. Minimize the cost of debt.

  C. Maximize the net worth of the firm.

  D. Minimize the cost of equity.

  Correct Answer: C

  Financial structure is the composition of the financing sources of the assets of a firm. Traditionally, the financial structure consists of current liabilities, Long-term debt, retained earnings, and stock For most firms, the optimum structure includes a combination of debt and equity. Debt is cheaper than equity, but excessive use of debt increases the firm's risk and drives up the weighted-average cost of capital.