Chapter 9 The Cost of Capital

25) Preferred dividends are paid with before-tax dollars because the dividend rate is known, whereas common stock dividends are paid with after-tax dollars.

26) An increase in a corporation's marginal tax rate will cause the corporation's after tax cost of debt to increase, other things remaining the same.

27) Because investors like dividends, the higher the company's dividend growth rate, the lower the company's cost of common equity.

28) An increase in a corporation's marginal tax rate will decrease the corporation's cost of debt, but have no impact on its cost of preferred stock or cost of common equity.

29) Two factors that cause the investor's required rate of return to differ from the company's cost of capital are

A) taxes and risk.

B) transactions costs and risk.

C) taxes and transactions costs.

D) risk and opportunity cost differences.

30) Two considerations that cause a corporation's cost of capital to be different than its investors' required returns are

A) corporate taxes and flotation costs.

B) individual taxes and corporate taxes.

C) individual taxes and dividends.

D) corporate taxes and the earned income tax credit.

31) Due to changes in regulatory requirements, the transactions costs associated with selling corporate securities increased by $1 per share. This change will

A) cause the cost of capital to decrease.

B) cause the cost of capital to increase.

C) have no effect on the cost of capital because transactions costs are expensed immediately.

D) cause the cost of capital to decrease only if investors may be billed for part of the increase in transactions costs.

32) Adventure Outfitter Corp. can sell common stock for $27 per share and its investors require a 17% return. However, the administrative or flotation costs associated with selling the stock amount to $2.70 per share. What is the cost of capital for Adventure Outfitter if the corporation raises money by selling common stock?

A) 27.00%

B) 18.89%

C) 18.33%

D) 17.00%

33) A company has preferred stock that can be sold for $21 per share. The preferred stock pays an annual dividend of 3.5% based on a par value of $100. Flotation costs associated with the sale of preferred stock equal $1.25 per share. The company's marginal tax rate is 35%. Therefore, the cost of preferred stock is

A) 18.87%.

B) 17.72%.

C) 14.26%.

D) 12.94%.

34) Sentry Manufacturing paid a dividend yesterday of $5 per share (D0= $4). The dividend is expected to grow at a constant rate of 8% per year. The price of Sentry Manufacturing's stock today is $29 per share. If Sentry Manufacturing decides to issue new common stock, flotation costs will equal $2.50 per share. Sentry Manufacturing's marginal tax rate is 35%. Based on the above information, the cost of retained earnings is

A) 28.38%.

B) 24.12%.

C) 26.62%.

D) 31.40%.