Intermediate Financial Management 12th Edition by Eugene F. Brigham – Test Bank

1. “Capital” is sometimes defined as funds supplied to a firm by investors.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.69 – LO: 11-1
NATIONAL STANDARDS: United States – BUSPROG: Reflective Thinking
STATE STANDARDS: United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of capital
LOCAL STANDARDS: United States – OH – Default City – TBA
TOPICS: Capital
KEYWORDS: Bloom’s: Knowledge

2. The cost of capital used in capital budgeting should reflect the average cost of the various sources of long-term funds a firm uses to acquire assets.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.69 – LO: 11-1
NATIONAL STANDARDS: United States – BUSPROG: Reflective Thinking
STATE STANDARDS: United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of capital
LOCAL STANDARDS: United States – OH – Default City – TBA
TOPICS: Cost of capital
KEYWORDS: Bloom’s: Knowledge

3. The component costs of capital are market-determined variables in the sense that they are based on investors’ required returns.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.69 – LO: 11-1
NATIONAL STANDARDS: United States – BUSPROG: Reflective Thinking
STATE STANDARDS: United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of capital
LOCAL STANDARDS: United States – OH – Default City – TBA
TOPICS: Component capital costs
KEYWORDS: Bloom’s: Knowledge

4. Suppose you are the president of a small, publicly-traded corporation. Since you believe that your firm’s stock price is temporarily depressed, all additional capital funds required during the current year will be raised using debt. In this case, the appropriate marginal cost of capital for use in capital budgeting during the current year is the after-tax cost of debt.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.70 – LO: 11-8
NATIONAL STANDARDS: United States – BUSPROG: Reflective Thinking
STATE STANDARDS: United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of capital
LOCAL STANDARDS: United States – OH – Default City – TBA
TOPICS: Specific capital cost
KEYWORDS: Bloom’s: Knowledge

5. The before-tax cost of debt, which is lower than the after-tax cost, is used as the component cost of debt for purposes of developing the firm’s WACC.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.71 – LO: 11-3
NATIONAL STANDARDS: United States – BUSPROG: Reflective Thinking
STATE STANDARDS: United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of capital
LOCAL STANDARDS: United States – OH – Default City – TBA
TOPICS: Cost of debt
KEYWORDS: Bloom’s: Knowledge

6. The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.71 – LO: 11-3
NATIONAL STANDARDS: United States – BUSPROG: Reflective Thinking
STATE STANDARDS: United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of capital
LOCAL STANDARDS: United States – OH – Default City – TBA
TOPICS: Cost of debt
KEYWORDS: Bloom’s: Knowledge

7. The cost of debt is equal to one minus the marginal tax rate multiplied by the interest rate on new debt.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.71 – LO: 11-3
NATIONAL STANDARDS: United States – BUSPROG: Reflective Thinking
STATE STANDARDS: United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of capital
LOCAL STANDARDS: United States – OH – Default City – TBA
TOPICS: Cost of debt
KEYWORDS: Bloom’s: Knowledge

8. The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends received by a corporation may be excluded from the receiving corporation’s taxable income.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.72 – LO: 11-4
NATIONAL STANDARDS: United States – BUSPROG: Reflective Thinking
STATE STANDARDS: United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of capital
LOCAL STANDARDS: United States – OH – Default City – TBA
TOPICS: Cost of preferred stock
KEYWORDS: Bloom’s: Knowledge

9. The cost of perpetual preferred stock is found as the preferred’s annual dividend divided by the market price of the preferred stock. No adjustment is needed for taxes because preferred dividends, unlike interest on debt, is not deductible by the issuing firm.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.72 – LO: 11-4
NATIONAL STANDARDS: United States – BUSPROG: Reflective Thinking
STATE STANDARDS: United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of capital
LOCAL STANDARDS: United States – OH – Default City – TBA
TOPICS: Cost of preferred stock
KEYWORDS: Bloom’s: Knowledge

10. The cost of common equity obtained by retaining earnings is the rate of return the marginal stockholder requires on the firm’s common stock.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.73 – LO: 11-6
NATIONAL STANDARDS: United States – BUSPROG: Reflective Thinking
STATE STANDARDS: United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of capital
LOCAL STANDARDS: United States – OH – Default City – TBA
TOPICS: Cost of common stock
KEYWORDS: Bloom’s: Knowledge