COST OF CAPITAL

1. If D1 = P1.25, g (which is constant) = 4.7%, and P0 = P26.00, what is the stock’s

expected dividend yield for the coming year?
a. 4.12% c. 4.57%
b. 4.34% d. 4.81%
2. If D0 = P1.75, g (which is constant) = 3.6%, and P0 = P32.00, what is the stock’s expected
total return for the coming year?
a. 8.37% c. 8.81%
b. 8.59% d. 9.27%
3. Conquest, Inc. has an outstanding issue of perpetual preferred stock with an annual dividend
of P7.50 per share. If the required return on this preferred stock is 6.5%, at what price
should the stock sell?
a. P104.27 c. P109.69
b. P106.95 d. P115.38
4. Raptor Corporation just paid a dividend of P0.75 per share, and that dividend is expected
to grow at a constant rate of 6.50% per year in the future. The company's beta is 1.25, the
required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the
company's current stock price?
a. P14.52 c. P15.26
b. P14.89 d. P15.64
5. Microtel Inc.'s perpetual preferred stock sells for P97.50 per share, and it pays an P8.50
annual dividend. If the company were to sell a new preferred issue, it would incur a flotation
cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock
for use in calculating the WACC?
a. 8.72% c. 9.44%
b. 9.08% d. 9.82%
6. Gukesh Systems Inc. is expected to pay a P2.50 dividend at year end (D1 = P2.50), the
dividend is expected to grow at a constant rate of 5.50% a year, and the common stock
currently sells for P52.50 a share. The before- tax cost of debt is 7.50%, and the tax rate is
40%. The target capital structure consists of 45% debt and 55% common equity. What is the
company’s WACC if all the equity used is from retained earnings?
a. 7.07% c. 7.67%
b. 7.36% d. 7.98%
7. HLD, Inc. has a growth rate of 6 percent and is equally as risky as the market. The stock is
currently selling for P15 a share. The overall stock market has a 12 percent rate of return and
a risk premium of 9 percent. What is the expected rate of return on HLD's stock?
a. 6 percent c. 12 percent
b. 9 percent d. 15 percent
8. A 12-year bond has a 9 percent annual coupon, a yield to maturity of 8 percent, and a face
value of P1,000. What is the price of the bond?
a. P1,469 c. P 928
b. P1,000 d. P1,075
9. Borg Inc. has just paid a dividend of P2.00. Its stock is now selling for P48 per share. The
firm is half as risky as the market. The expected return on the market is 14 percent, and the
yield on Treasury bills is 11 percent. If the market is in equilibrium, what rate of growth is
expected?
a. 13% c. 10%
b. 4% d. 8%
10. Fabiano Company is interested in calculating it weighted-average cost of capital. Fabiano
has a current financial structure that is composed of 50% debt, 40% common stock, and 10%
preferred stock. Ignore the effects of cost of retained earnings. The beta of Fabiano stock is
0.7, and the current risk-free rate of return is 4%. The market risk premium is 6%. The
preferred dividend on Fabiano preferred stock is set at P2.25, and the net issuance price per
share (which happens to be the same as the current price per share) of preferred stock is
P30. Debt issued by Fabiano yields an 11% stated interest rate to investors. The marginal
tax rate for Fabiano is 40%. What is the weighted-average cost of capital for Fabiano?
a. 0.0743 c. 0.0660
b. 0.0820 d. 0.0733
11. Keeper Inc.'s stock has a required rate of return of 11.50%, and it sells for P25.00 per share.
Keeper's dividend is expected to grow at a constant rate of 7.00%. What was the last
dividend, D0?
a. P0.95 c. P1.16
b. P1.05 d. P1.27
12. Bembe Inc.'s stock has a 50% chance of producing a 25% return, a 30% chance of
producing a 10% return, and a 20% chance of producing a -28% return. What is the firm's
expected rate of return?
a. 9.41% c. 9.90%
b. 9.65% d. 10.15%
13. Billie Jean has P100,000 invested in a 2-stock portfolio. P35,000 is invested in Stock X
and the remainder is invested in Stock Y. X's beta is 1.50 and Y’s beta is 0.70. What is
the portfolio's beta?
a. 0.65 c. 0.89
b. 0.72 d. 0.98
14. Assume that you hold a well-diversified portfolio that has an expected return of 11.0% and a
beta of 1.20. You are in the process of buying 1,000 shares of Alpha Corp at P10 a share
and adding it to your portfolio. Alpha has an expected return of 13.0% and a beta of 1.50.
The total value of your current portfolio is P90,000. What will the expected return and beta on
the portfolio be after the purchase of the Alpha stock?
a. 10.64%; 1.17 c. 11.76%; 1.29
b. 11.20%; 1.23 d. 12.35%; 1.36
15. Marie Products has outstanding bonds with an annual 8 percent coupon. The bonds have a
par value of P1,000 and a price of P865. The bonds will mature in 11 years. What is the
yield to maturity on the bonds?
a. 10.09% c. 9.25%
b. 11.13% d. 8.00%

NAME:

1. 6. 11.

2. 7. 12.

3. 8. 13.

4. 9. 14.

5. 10. 15.