FIN 650 GC Week 6 Exam 2 Latest

Question 1. Your consultant firm has been hired by Eco Brothers Inc. to help them estimate the cost of common equity. The yield on the firm’s bonds is 8.75%, and your firm’s economists believe that the cost of common can be estimated using a risk premium of 3.85% over a firm’s own cost of debt. What is an estimate of the firm’s cost of common from reinvested earnings?






Question 2. Which of the following statements best describes the optimal capital structure?

The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company’s ____.

stock price

cost of equity

cost of debt

earnings per share (EPS)

preferred stock.

Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure?

Its sales become less stable over time.

The costs that would be incurred in the event of bankruptcy increase.

Management believes that the firm’s stock has become overvalued.

Its degree of operating leverage increases.

The corporate tax rate increases.

Question 3. Reynolds Paper Products Corporation follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in the firm’s dividend per share?

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