Q. The term "capital structure" refers to:
✅ Correct Answer: (A)
long-term debt, preferred stock, and common stock equity.
Financial Management MCQs and Notes
Q. Lei-Feng, Inc.'s $100 par value preferred stock just paid its $10 per share annual dividend. The preferred stock has a current market price of $96 a share. The firm's marginal tax rate (combined federal and state) is 40 percent, and the firm plans to maintain its current capital structure relationship into the future. The component cost of preferred stock to Lei-Feng, Inc. would be closest to .
✅ Correct Answer: (D)
10.4 percent
Q. Rank in ascending order (i.e., 1 = lowest, while 3 = highest) the likely after-tax component costs of a Company's long-term financing.
✅ Correct Answer: (B)
1 = bonds; 2 = preferred stock; 3 = common stock.
Q. Market values are often used in computing the weighted average cost of capital because
✅ Correct Answer: (B)
this is consistent with the goal of maximizing shareholder value.
Q. A quick approximation of the typical firm's cost of equity may be calculated by
✅ Correct Answer: (A)
adding a 5 percent risk premium to the firm's before-tax cost of debt.
Q. The common stock of a company must provide a higher expected return than the debt of the same company because
✅ Correct Answer: (C)
there is more systematic risk involved for the common stock.
Q. In calculating the costs of the individual components of a firm's financing, the corporate tax rate is important to which of the following component cost formulas?
✅ Correct Answer: (B)
debt.
Q. In calculating the proportional amount of equity financing employed by a firm, we should use:
✅ Correct Answer: (D)
the current market price per share of common stock times the number of shares outstanding.
Q. The cost of equity capital is all of the following EXCEPT:
✅ Correct Answer: (D)
generally lower than the before-tax cost of debt.
Q. A single, overall cost of capital is often used to evaluate projects because:
✅ Correct Answer: (A)
it avoids the problem of computing the required rate of return for each investment proposal.