Reference no: EM132562804

Problem 1: Which of the following statements is not correct?

Option 1: Preferred dividends paid are not tax deductible.

Option 2: Interest expense is not tax deductible.

Option 3: Common dividends paid are not tax deductible.

Option 4: None of the statements above is correct.

Problem 2: Which of following statements is not correct?

Option 1: Capital components are sources of funding that come from investors: debt, preferred stock, common equity.

Option 2: Accounts payable, accruals, and deferred taxes are not sources of funding that come from investors, so they are not included in the calculation of the cost of capital.

Option 3: Tax effects associated with financing can be incorporated either in capital budgeting cash flows or in cost of capital.

Option 4: The cost of capital is used primarily to make decisions which involve raising and investing new capital. So, we should focus on historical (embedded) costs rather than new (marginal) costs.

Problem 3: You just inherited $10,000. You are investing this money for 4 years at 5% compounding interest. In whole dollars, how much money will you have at the end of the four years?

Option 1: $11,000

Option 2: $12,100

Option 3: $12,155

Option 4: $12,000

Problem 4: Which of the following statements is NOT correct?

Option 1: When estimating the cost of debt, don't use the coupon rate on existing debt. Use the current interest rate on new debt.

Option 2: When estimating the risk premium for the CAPM approach, don't subtract the current long-term T-bond rate from the historical average return on common stocks.

Option 3: Use the target capital structure to determine the weights. If you don't know the target weights, then use the current book value of equity in the balance sheet, and never use the market value of equity.

Option 4: Capital components are sources of funding that come from investors. Accounts payable, accruals, and deferred taxes are not sources of funding that come from investors, so they are not included in the calculation of the WACC.

Problem 5: Which of the following statements about sinking fund is true?

Option 1: Sinking funds are designed to protect bondholders, so it never hurts the bondholders in any situations.

Option 2: A company would use sinking fund for open market purchase of bond if the interest rate is much higher than its coupon rate.

Option 3: A company would prefer to use sinking fund to call bond if bond sells at a discount price.

Problem 6: A store is offering a diamond ring for sale for 60 months at $100 per month. The retail price of the ring is $5,000. What is the annualized interest rate on this offer?

Option 1: 10.51%

Option 2: 9.28%

Option 3: 7.42%

Option 4: 8.68%