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Free CMA Exam Braindumps (page: 187)

Page 187 of 336
PDF with 1336 Questions
View Related Case Study

The firm's marginal cost of capital

  1. Should be the same as the firm's rate of return on equity.
  2. Is unaffected by the firms capital structure.
  3. Is inverse' related to the firm's required rate of return used in capital budgeting.
  4. Is a weighted average of the investors' required returns on debt and equity

Answer(s): D

Explanation:

The marginal cost of capital is the cost of the next dollar of capital. The marginal cost continually increases because the lower cost sources of funds are used first. The marginal cost represents a weighted average of 1both debt and equity capital.



View Related Case Study

Datacomp Industries, which has no current debt, has a beta of .95 for its common stock. Management is considering a change in the capital structure to 30% debt and 70% equity This change would increase the beta on the stock to 1.05. and the after-tax cost of debt will be 75%. The expected return on equity is 16%, and the risk-free rate is 6%. Should Datacomp's management proceed with the capital structure change?

  1. No, because the cost of equity capital will increase.
  2. Yes, because the cost of equity capital will decrease.
  3. Yes, because the weighted-average cost of capital will decrease.
  4. No, because the weighted-average cost of capital will increase.

Answer(s): C

Explanation:

The important consideration is whether the overall cost of capital will be lower for a given proposal. According to the Capital Asset Pricing Model, the change will result in a lower average cost of capital For the existing structure, the cost of equity capital is 15.5% [6% + 95(16% -- 6%)1, Because the company has no debt, the average cost of capital is also 15.5%. Under the proposal, the cost of equity capital is 16.5% [6% + 1.05(16% -- 6%)]. and the weighted average cost of capital is 13.8% [.3(075) + 7(165)]. Hence, the proposal of 13.8% should be accepted



View Related Case Study

Networking capital is the difference between

  1. Current assets and current liabilities.
  2. Fixed assets and fixed liabilities.
  3. Total assets and total liabilities.
  4. Shareholders' investment and cash.

Answer(s): A

Explanation:

Net working capital is defined by accountants as the difference between current assets and current liabilities. Working capital is a measure of short-term solvency.



View Related Case Study

Determining the appropriate level of working capital for a firm requires

  1. Changing the capital structure and dividend policy of the firm.
  2. Maintaining short-term debt at the lowest possible level because it is generally more expensive than long-term debt.
  3. Offsetting the benefit of current assets and current liabilities against the probability of technical insolvency.
  4. Maintaining a high proportion of liquid assets to total assets in order to maximize the return on total investments.

Answer(s): C

Explanation:

Working capital finance concerns the determination of the optimal level, mix, and use of current assets and current liabilities. The objective is to minimize the cost of maintaining liquidity, while guarding against the possibility of technical in solvency. Technical in solvency is defined as the inability to pay debts as they come due.



Page 187 of 336



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