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Free CMA Exam Braindumps (page: 177)

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The after-tax cost to FLF Corporation of the new bond issue is

  1. 4%
  2. 6%
  3. 10%
  4. 14%

Answer(s): B

Explanation:

Because the bonds are issued at their face value, the pretax effective rate is 10%. However, interest is deductible for tax purposes, so the government absorbs 40% of the cost, leaving a 6% after-tax cost.The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods, the cost of capital for the firm must be estimated. The following information for FLF Corporation is provided:
· The market price of common stock is $60 per share. · The dividend next year is expected to be $3 per share. · Expected growth in dividends is a constant 10%. · New bonds can be issued at face value with a 10% coupon rate. · The current capital structure of 40% long-term debt and 60% equity is considered to be optimal.
· Anticipated earnings to be retained in the coming year are $3 million.
· The firm has a 40% marginal tax rate.



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If FLF Corporation must assume a 20% flotation cost on new stock issuances. what is the cost of new common stock'?

  1. 6.25%
  2. 15%
  3. 16.25%
  4. 10%

Answer(s): C

Explanation:

The company will receive only 80% of the $60 market price, or $48.Consequently, the dividend7 yield is 625% ($3. $48). Adding the 10% growth rate produces a cost of new equity capital of 1625%. I
The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods, the cost of capital for the firm must be estimated. The following information for FLF Corporation is provided:
· The market price of common stock is $60 per share, · The dividend next year is expected to be $3 per share. · Expected growth in dividends is a constant 10%. · New bonds can be issued at face value with a 10% coupon rate. · The current capital structure of 40% long-term debt and 60% equity is considered to be optimal.
· Anticipated earnings to be retained in the coming year are $3 million.
· The firm has a 40% marginal tax rate.



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The cost of using FLF Corporation retained earnings for financing is

  1. 5%
  2. 9%
  3. 10%
  4. 15%

Answer(s): D

Explanation:

The cost of internal equity capital equals the dividend yield (dividends per share · market price) plus the dividend growth rate. Dividing the $3 dividend by the $60 market price results in a yield of 5%. Adding the 10% dividend growth rate produces a cost of I 5% for retained earnings. No adjustment is made for taxes because dividends are not tax deductible.
The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods, the cost of capital for the firm must be estimated. The following information for FLF Corporation is provided:
· The market price of common stock is $60 per share. · The dividend next year is expected to be $3 per share. · Expected growth in dividends is a constant 10%. · New bonds can be issued at face value with a 10% coupon rate. · The current capital structure 0140% long-term debt and 60% equity is considered to be optimal.
· Anticipated earnings to be retained in the coming year are $3 million.
· The firm has a 40% marginal tax rate.



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The maximum capital expansion that FLF Corporation can support in the coming year without resorting to external equity financing is

  1. $2 million.
  2. $3 million.
  3. $5 million.
  4. Cannot determine from the information given.

Answer(s): C

Explanation:

The current optimal capital structure is 40% debt and 60% equity. The $3 million to be retained 1from earnings in the coming year represents the equity portion of the maximum new capital outlay. To retain the optimal capital structure, $2 million of debt must be added to the $3 million of retained earnings. Hence, the maximum capital expansion is $5 million. The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods, the cost of capital for the firm must be estimated. The following information for FLF Corporation is provided:
· The market price of common stock is $60 per shares · The dividend next year is expected to be $3 per share. · Expected growth in dividends is a constant 10%. · New bonds can be issued at face value with a 10% coupon rate. · The current capital structure of 40% long-term debt and 60% equity' is considered to be optimal.
· Anticipated earnings to be retained in the coming year are $3 million.
· The firm has a 40% marginal tax rate.






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