Quiz

1. Many firms have retired their preference share because

a. preference share Is sold on a lower yield basis than ordinary share and dividends are taxable to the
stockholder.

b. preferences share lacks a maturity date and dividends are not deductible for tax purposes.

c. dividend payments are not guaranteed to the shareholder and are taxable to the shareholder.

d. dividend payments are a fixed obligation and are not deductible for tax purposes.

2. A firm using a private placement to raise capital would generally be issuing

a. ordinary shares.

b. preference shares.

c. long-term bonds.

d. warrants.

3. A "tender offer” is

a. an advance by a customer on the purchase of merchandise.

b. a method of determining the effects of merger on earnings.

c. a proxy fight

d. a direct appeal to purhase shares from shareholders.

4. When a firm finances each asset with a financial instrument of the same approximate maturity as the
life of the asset, it is applying

a. portfolio management.

b. return maximization.

c. financial leverage.

d. a hedging approach.

5. All of the following are good sources of financing for permanent working capital except

a. a bank line of credit.

b. retained earnings.

c. preference share.

d. ordinary share.
7. A leasing arrangement in which the lessor borrows money to acquire
the leased property is called a(n)

a Operating lease.

b. sale and leaseback.

c. financial lease.

d. leveraged lease.

8. The current market price of Lee Company stock is P80 per share and its
price-earnings ratio is 8 to l. A P4 annual dividend was just paid to current
shareholders. lf dividends and earnings are expected to grow at a constant
rate of 12 percent, Lee Company’s cost of retained earnings is

a. 50%. c. l7.0%
9. Bee Corp. will issue PlOO million of preference shares. The stock will pay a P9
dividend and the offer price to the public will be P50 per share. Bee’s tax rate is 40
percent. Assuming floatation costs of P3 per share, Bee's cost of preference share
financing is

a. 18. 67% c. 18.00%

b. 11.49% d. 19.15%

10. A firm maintain a debt/equity ratio of 1.0. The debt consists of bonds with a
before tax cost of 9%. The equity consists of ordinary shares with a cost of 18%.
The marginal corporate tax rate is 40%. What is the weighted average cost of
capital?

a. 8.1% c. 10.8%
8. Cost of retained earnings = P4.48/P80 +12% =
17.6%

P4.48 (P4 x 1.12)

9. P9/P47=19.15%

10.