23) Generally the least expensive source of long-term capital is?

23) Generally the least expensive source of long-term capital is

A) short-term debt. B) retained earnings.

C) long-term debt. D) preferred stock.

24) A firm has determined its cost of each source of capital and optimal capital structure, which is

composed of the following sources and target market value proportions:

Target Market

Source of Capital Proportions After-Tax Cost

Long-term debt 40% 6%

Preferred stock 10 11

Common stock equity 50 15

The weighted average cost of capital is

A) 15 percent. B) 11 percent. C) 6 percent. D) 10.7 percent.

ESSAY. Write your answer in the space provided or on a separate sheet of paper.

25) Promo Pak has compiled the following financial data:

Source of Capital Book Value Market Value Cost

Long-term debt $10,000,000 $8,500,000 5.0%

Preferred stock 1,000,000 1,500,000 14.0

Common stock equity 9,000,000 15,000,000 20.0

$20,000,000 $25,000,000

(a) Calculate the weighted average cost of capital using book value weights.

(b) Calculate the weighted average cost of capital using market value weights.

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

26) An increase in current assets increases net working capital, thereby reducing the risk of technical

insolvency.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

27) Net working capital is defined as

A) current assets minus current liabilities.

B) current liabilities minus current assets.

C) a ratio measure of liquidity best used in cross-sectional analysis.

D) the portion of the firm’s assets financed with short-term funds.

28) The goal of working capital management is to

A) pay off short-term debts.

B) achieve a balance between short-term and long-term assets so that they add to the

achievement of the firm’s overall goals.

C) achieve a balance between risk and return in order to maximize the firm’s value.

D) balance current assets against current liabilities.

29) The two major sources of short-term financing are

A) accounts receivable and notes payable. B) accounts payable and accruals.

C) a line of credit and accruals. D) a line of credit and accounts payable.

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

30) Fixed assets are the most desirable short-term loan collateral since they normally have a longer life,

or duration, than the term of the loan.