11 May WHICH OF THE FOLLOWING DIFFERENTIATES THE COST OF RETAINED EARNINGS FROM THE COST OF NEWLY-ISSUED COMMON STOCK?
Which of the following differentiates the cost of
retained earnings from the cost of newly-issued common stock?
A) the cost of the pre-emptive rights held by existing
shareholders
B) the greater marginal tax rate faced by the now-larger
firm
C) the flotation costs incurred when issuing new securities
D) the larger dividends paid to the new common stockholders45) JPR Company is financed 75 percent by equity and 25
percent by debt. If the firm expects to earn $30 million in net income next
year and retain 40% of it, how large can the capital budget be before common
stock must be sold?A) $7.5 millionB) $12.0 millionC) $15.5 millionD) $16.0 million 46) The cost of new preferred stock is equal toA) the preferred stock dividend divided by the market
price.B) the preferred stock dividend divided by its par value.C) (1 – tax rate) times the preferred stock dividend
divided by net price.D) preferred stock dividend divided by the net selling
price of preferred. 47) In general, the least expensive source of capital isA) debt.B) new common stock.C) preferred stockD) retained earnings. 48) The cost of external equity capital is greater than the
cost of retained earnings because ofA) flotation costs on new equity.B) increasing marginal tax rates.C) higher dividends.D) greater risk for shareholders. 49) Phillips Enterprises Inc. is expected to pay a dividend
of $2.60 next year. Dividends are expected to grow at a constant rate of 8% per
year, and the stock price is currently $20.00. New stock can be sold at this
price subject to flotation costs of 15%. The company’s marginal tax rate is
35%. Compute the cost of internal equity (retained earnings) and the cost of
external equity (new common stock), respectively.A) 0, 21.00%B) 8.00%, 23.29%C) 21.00%, 23.29%D) 23.00%, 25.48% 50) JPR Company’s preferred stock is currently selling for
$28.00, and pays a perpetual annual dividend of $2.00 per share. Underwriters
of a new issue of preferred stock would charge $3 per share in flotation costs.
The firm’s tax rate is 40%. Compute the cost of new preferred stock for JPR.A) 4.80%B) 7.14%C) 8.00%D) 9.15% 51) GPS Inc. wishes to estimate its cost of retained
earnings. The firm’s beta is 1.3. The rate on 6-month T-bills is 2%, and the
return on the S&P 500 index is 15%. What is the appropriate cost for
retained earnings in determining the firm’s cost of capital?A) 17.0%B) 19.5%C) 18.9%D) 22.1% 52) In capital budgeting analysis, when computing the
weighted average cost of capital, the CAPM approach is typically used to find
which of the following?A) market value weight of equityB) pretax component cost of debtC) after-tax component cost of debtD) component cost of internal equity 53) The cost of retained earnings is less than the cost of
new common stock becauseA) marginal tax brackets increase.B) flotation costs are incurred when new stock is issued.C) dividends are not tax deductible.D) accounting rules allow a deduction when using retained
earnings. 54) Which of the following differentiates the cost of
retained earnings from the cost of newly-issued common stock?A) the cost of the pre-emptive rights held by existing
shareholdersB) the greater marginal tax rate faced by the now-larger
firmC) the flotation costs incurred when issuing new securitiesD) the larger dividends paid to the new common stockholders
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