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Chapter 12

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The internal rate of return may also be thought of as

	the rate of return required by the market suppliers of capital to attract their funds to the firm.
	the cost of capital.
	the interest rate that sets net present value equal to zero.
	the rate of return required by the market suppliers of capital to exceed the average market return.

Short-term financing supports

	current asset investment.
	current liability investment.
	fixed-asset investment.
	equity investment.

Most short-term debts of publicly traded U.S. corporations are incurred through

	bank loans.
	the sale of equity.
	borrowing from the government.
	the sale of bonds.

PearBlossom Company has shares of preferred stock outstanding. The current preferred stock price is $50 per share and the company pays preferred stock dividends of $4 per share. If the growth rate in the economy is expected to remain at a constant rate of 3%, what is the market rate of return for the preferred stock?

	7.5%
	8 %
	10.3%
	12.3%

Gromit Company expects to pay dividends of $2 per share next year. The company has shown steady growth in its dividends of 5% per year for some time and expects this trend to continue indefinitely. If the required rate of return for the firm's stock is 12% and the expected rate of inflation is 3%. What is the current price of Gromit's stock?

	$16.33
	$21.27
	$23.33
	$28.57

Tidal Co. common stock has a beta of 1.75, the risk-free rate is 4%, and the expected return on the market portfolio is 12%. What is the firm's cost (%) of common stock?

	13%
	18%
	21%
	36%

For the weighted average cost of capital to be accurate, the sum of the weights

	must be less than one.
	must equal one.
	must be greater than one.
	depends on the situation, therefore there is no definite answer.

A corporation expects to have earnings available to common shareholders (net profits minus preferred dividends) of $1,000,000 in the coming year. The firm plans to pay 50 percent of earnings available in cash dividends. If the firm has a target capital structure of 40 percent long-term debt, 20 percent preferred stock, and 40 percent common stock equity, what capital budget could the firm support without issuing new common stock?

	$2,500,000
	$1,600,000
	$1,250,000
	$800,000

A firm has determined its cost of each source of capital and its optimal capital structure which is composed of the following sources and target market value proportions.

Source of Capital	Target Market Proportions	After Tax Cost
Long-Term Debt	35%	6%
Preferred Stock	10%	10%
Common Stock Equity	55%	14%

The firm is considering an investment opportunity, which has an internal rate of return of 10 percent. The project

	should not be considered because its internal rate of return is less than the cost of equity.
	should be considered because its internal rate of return is greater than the cost of debt.
	should not be considered because its internal rate of return is less than the weighted average cost of capital.
	should be considered because its internal rate of return is greater than the weighted average cost of capital.

The wealth-maximizing investment decision for a firm occurs when

	the weighted average cost of capital equals the return on the project.
	the weighted marginal cost of capital is less than the investment opportunity schedule.
	the weighted cost of capital exceeds the marginal cost of capital.
	the weighted marginal cost of capital equals the investment opportunity schedule.

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