Question 4

Considering The Financial Practices and Management from C214, answer question 3 from section E.1-E.6

E.1 What is the priority order of repayment toa companies investors and creditors?

1. Common stockholders, preferred stockholders, creditors

2. Preferred stockholders, creditors, common stockholders

3. Creditors, preferred stockholders, common stockholders

4. Creditors, common stockholders, preferred stockholders

E.2 Supply and demand factors suggest that slope for an individual asset in the portfolio will equal the slope of the market portfolio itself.What is the significance of this equalization?

1. The slope of individual assets in a portfolio will diverge to increase diversification

2. Investors will be forced to frequently shift their portfolios

3. The entire risk return slope will decrease over time

4. Investors will be incentivized to hold the market portfolio

E.3 What are the 3 components required in calculating weighted average cost of capital?

(choose 3 answers)

1. Desired growth rate

2. Amount and required return for common equity, preferred equity and debt

3. The marginal tax rate

4. The market cap of the company

5. The combined total expected growth rate

6. The value of preferred stock and debt

7. The firms market value

E.4 A company has a total market value of $100 million, 30 million of which is short term debt. The cost of the short term debt was 4.5%. The company has a marginal tax rate of 40%.

1. 30.1%

2. 4.5%

3. 1.35%

4. 0.81%

E.5 Which advantage does the gordon growth model have compared to the capital asset pricing model (capm)?

1. It provides an easier to understand and relatively accurate forecast when growth rates are stable

2. It requires the use of accurate known traders, such as future growth rates

3. It is highly accurate in predicting future growth

4. It requires assumptions about growth that benefit fast growing companies

E.6 How does weighted average cost of capital affect a companies growth opportunities?

1. The lower the cost of capital, the greater the growth opportunities

2. The lower the cost of capital, the lower the growth opportunities

3. Only the cost of debt will affect growth opportunities

4. The higher the cost of capital, the greater the growth opportunities