MODULE 2

Question 1
0 out of 1 points
The return on debt (rd) to be used in computing for the after-tax cost of debt can be the coupon rate, if it is the
same with the yield-to-maturity (YTM).
Correct Answer: True
Question 2
0 out of 1 points
The rationale why cost of debt is adjusted for taxes is because interest expense reduces the companys net
income.
Correct Answer: False
Question 3
0 out of 1 points
Kobes Co.s interest rate for its outstanding debt (as recorded in its BS) is 10%. Kobe can
borrow from a bank for its capital expenditures at an interest rate of 9%. If the marginal tax rate
is 30%, what is Kobes after-tax cost of debt for WACC purposes? (Answer in this format: e.g.
7%, 9.50%, 12.25%)
Correct Answer:
Evaluation Method Correct Answer Case Sensitivity
Exact Match 6.30%

Exact Match 6.30

Exact Match 6.3%

Exact Match 6.3

Question 4
0 out of 1 points
Which of the following can be considered as before-tax cost of debt?
Correct Answer:
b. Expected return on debt
Question 5
0 out of 1 points
In specific instances, flotation costs are not included in computing for the rd or return on debt (specifically, the
YTM) to arrive at the after-tax cost of debt because using debt incurs no flotation costs.
Correct Answer: False
Question 6
1 out of 1 points
Karl Company. has the following information pertaining to its preferred stocks:

Par Value = P100 Stock Price = P90 Annual Dividend = 10%

What is Karls cost of preferred stocks? (Answer in this format: e.g. 7%, 9.50%, 12.25%)

Correct Answer:
 Evaluation Method Correct Answer Case Sensitivity
Exact Match 11.11%

Exact Match 11.11

Question 7
1 out of 1 points
Use of retained earnings as a source of equity fund has a cost because dividends to be paid come from retained
earnings.
Correct Answer: False
Question 8
1 out of 1 points
When inflation increases, what will happen to the cost of debt and cost of equity?
Correct Answer:
c) Increase Increase
Question 9
0 out of 1 points
Carl Inc. has the following information pertaining to its debt and equity:
Year-end dividend = P5
Stock price = P60
Growth rate = 3.5%

Risk-free rate = 4%
Beta = 1.5
MRP = 4%

Interest rate on its bonds = 6%

Carl Inc. is considered as a high-risk company.

Using the bond-yield-plus-risk-premium approach, what is Carls cost of retained earnings (rs)? (Answer in this
format: e.g. 7%, 9.50%, 12.25%)

Correct Answer:
Evaluation Method Correct Answer Case Sensitivity
Exact Match 11%

Exact Match 11

Question 10
1 out of 1 points
In relation to the immediately preceding problem, assume that you have the highest confidence
in the inputs for the DCF (DDM) approach. What will be Carls cost of internal equity (rs)?
(Answer in this format: e.g. 7%, 9.50%, 12.25%)
Correct Answer:
Evaluation Method Correct Answer Case Sensitivity
Exact Match 11.83%

Exact Match 11.83

 Question 11
1 out of 1 points
Christian Paints Corporation has a targeted capital structure of 60% debt and 40% equity. Its
YTM is 9% and marginal tax rate is 40%. The current stock price is P25. Christians beta is
1.20. The average return on the market is 10%. Treasury bills yield 3%. What is Christians
WACC? (Answer in this format: e.g. 7%, 9.50%, 12.25%)
Correct Answer:
Evaluation Method Correct Answer Case Sensitivity
Exact Match 7.80%

Exact Match 7.80

Exact Match 7.8%

Exact Match 7.8