Finance for Managers
Mock Exam
Course Introduction
Finance for Managers is designed to equip non-financial managers and business professionals with a practical understanding of key financial concepts and tools used in organizational decision-making. The course covers fundamental topics such as interpreting financial statements, budgeting, cost analysis, investment appraisal, and managing working capital. Emphasis is placed on understanding the financial implications of managerial decisions, enabling participants to effectively communicate with finance professionals, assess business performance, and make strategic choices that contribute to the financial health and success of their organizations.
Recommended Textbook
Financial Management Theory and Practice 14th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Most businesses (by number and total dollar sales) are organized as partnerships or proprietorships because it is easier to set up and operate in one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, mainly because corporations have important tax advantages over proprietorships and partnerships.
B) Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations.
C) Most business (measured by dollar sales) is conducted by corporations in spite of large corporations' often less favorable tax treatment, due to legal considerations related to ownership transfers and limited liability.
D) Large corporations are taxed more favorably than sole proprietorships.
E) Corporate stockholders are exposed to unlimited liability.
Answer: C
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Chapter 2: Financial Statements, cash Flow, and Taxes
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Q1) TSW Inc.had the following data for last year: Net income = $800; Net operating profit after taxes (NOPAT)= $700; Total assets = $3,000; and Total operating capital = $2,000.Information for the just-completed year is as follows: Net income = $1,000; Net operating profit after taxes (NOPAT)= $925; Total assets = $2,600; and Total operating capital = $2,500.How much free cash flow did the firm generate during the just-completed year?
A) $383
B) $425
C) $468
D) $514
E) $566
Answer: B
Q2) Assets other than cash are expected to produce cash over time,but the amount of cash they eventually produce could be higher or lower than the values at which these assets are carried on the books.
A)True
B)False
Answer: True
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Chapter 3: Analysis of Financial Statements
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) If a firm has the highest price/earnings ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president.
B) If a firm has the highest market/book ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president.
C) Other things held constant, the higher a firm's expected future growth rate, the lower its P/E ratio is likely to be.
D) The higher the market/book ratio, then, other things held constant, the higher one would expect to find the Market Value Added (MVA).
E) If a firm has a history of high Economic Value Added (EVA) numbers each year, and if investors expect this situation to continue, then its market/book ratio and MVA are both likely to be below average.
Answer: D
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Chapter 4: Time Value of Money
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Sample Questions
Q1) As a result of compounding,the effective annual rate on a bank deposit (or a loan)is always equal to or greater than the nominal rate on the deposit (or loan).
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.
B) A time line is not meaningful unless all cash flows occur annually.
C) Time lines are not useful for visualizing complex problems prior to doing actual calculations.
D) Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
E) Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.
Q3) A time line is not meaningful unless all cash flows occur annually.
A)True
B)False
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6
Chapter 5: Bonds, bond Valuation, and Interest Rates
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Sample Questions
Q1) Currently,Bruner Inc.'s bonds sell for $1,250.They pay a $120 annual coupon,have a 15-year maturity,and a $1,000 par value,but they can be called in 5 years at $1,050.Assume that no costs other than the call premium would be incurred to call and refund the bonds,and also assume that the yield curve is horizontal,with rates expected to remain at current levels on into the future.What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)
A) 2.11%
B) 2.32%
C) 2.55%
D) 2.80%
E) 3.09%
Q2) A call provision gives bondholders the right to demand,or "call for," repayment of a bond.Typically,calls are exercised if interest rates rise,because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates. A)True B)False
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Chapter 6: Risk and Return
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Sample Questions
Q1) Barker Corp.has a beta of 1.10,the real risk-free rate is 2.00%,investors expect a 3.00% future inflation rate,and the market risk premium is 4.70%.What is Barker's required rate of return?
A) 9.43%
B) 9.67%
C) 9.92%
D) 10.17%
E) 10.42%
Q2) Which of the following statements is CORRECT?
A) Lower beta stocks have higher required returns.
B) A stock's beta indicates its diversifiable risk.
C) Diversifiable risk cannot be completely diversified away.
D) Two securities with the same stand-alone risk must have the same betas.
E) The slope of the security market line is equal to the market risk premium.
Q3) The SML relates required returns to firms' systematic (or market)risk.The slope and intercept of this line can be influenced by a manager's actions.
A)True
B)False
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Chapter 7: Valuation of Stocks and Corporations
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Q1) Which of the following statements is NOT CORRECT?
A) The corporate valuation model discounts free cash flows by the required return on equity.
B) The corporate valuation model can be used to find the value of a division.
C) An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements.
D) Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value.
E) The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends.
Q2) The preemptive right is important to shareholders because it
A) will result in higher dividends per share.
B) is included in every corporate charter.
C) protects the current shareholders against a dilution of their ownership interests.
D) protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.
E) allows managers to buy additional shares below the current market price.
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Page 9
Chapter 8: Financial Options and Applications in Corporate Finance
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Sample Questions
Q1) The current price of a stock is $50,the annual risk-free rate is 6%,and a 1-year call option with a strike price of $55 sells for $7.20.What is the value of a put option,assuming the same strike price and expiration date as for the call option?
A) $7.33
B) $7.71
C) $8.12
D) $8.55
E) $9.00
Q2) Other things held constant,the value of an option depends on the stock's price,the risk-free rate,and the
A) Variability of the stock price.
B) Option's time to maturity.
C) Strike price.
D) All of the above.
E) None of the above.
Q3) The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.
A)True
B)False
Page 10
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) If investors' aversion to risk rose,causing the slope of the SML to increase,this would have a greater impact on the required rate of return on equity,r<sub>s</sub>,than on the interest rate on long-term debt,r<sub>d</sub>,for most firms.Other things held constant,this would lead to an increase in the use of debt and a decrease in the use of equity.However,other things would not stay constant if firms used a lot more debt,as that would increase the riskiness of both debt and equity and thus limit the shift toward debt.
A)True
B)False
Q2) The lower the firm's tax rate,the lower will be its after-tax cost of debt and also its WACC,other things held constant.
A)True
B)False
Q3) The cost of external equity capital raised by issuing new common stock (r<sub>e</sub>)is defined as follows,in words: "The cost of external equity equals the cost of equity capital from retaining earnings (r<sub>s</sub>),divided by one minus the percentage flotation cost required to sell the new stock, (1 - F)."
A)True
B)False
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11
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Sample Questions
Q1) Current Design Co.is considering two mutually exclusive,equally risky,and not repeatable projects,S and L.Their cash flows are shown below.The CEO believes the IRR is the best selection criterion,while the CFO advocates the NPV.If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV,how much,if any,value will be forgone,i.e.,what's the chosen NPV versus the maximum possible NPV? Note that (1)"true value" is measured by NPV,and (2)under some conditions the choice of IRR vs.NPV will have no effect on the value gained or lost. \(\begin{array}{lccccc}
\text { WACC: } & 7.50 \% & & & \\
\text { Year } & 0 & 1 & 2 & 3 & 4 \\ \mathrm{CF}_{\mathrm{S}} & -\$ 1,100 & \$ 550 & \$ 600 & \$ 100 & \$ 100 \\ \mathrm{CF}_{\mathrm{L}} & -\$ 2,700 & \$ 650 & \$ 725 & \$ 800 & \$ 1,400 \end{array}\)
A) $138.10
B) $149.21
C) $160.31
D) $171.42
E) $182.52
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Page 12
Chapter 11: Cash Flow Estimation and Risk Analysis
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Q1) DeVault Services recently hired you as a consultant to help with its capital budgeting process.The company is considering a new project whose data are shown below.The equipment that would be used has a 3-year tax life,would be depreciated by the straight-line method over its 3-year life,and would have a zero salvage value.No new working capital would be required.Revenues and other operating costs are expected to be constant over the project's 3-year life.What is the project's NPV? \(\begin{array}{lr}
\text { Risk-adjusted WACC } & 10.0 \% \\
\text { Net investment cost (depreciable basis) } & \$ 65,000 \\
\text { Straight-line deprec. rate } & 33.3333 \% \\
\text { Sales revenues, each year } & \$ 65,500 \\
\text { Operating costs (excl. deprec.), each year } & \$ 25,000 \\
\text { Tax rate } & 35.0 \%
\end{array}\)
A) $15,740
B) $16,569
C) $17,441
D) $18,359
E) $19,325
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Chapter 12: Corporate Valuation and Financial Planning
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets. Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets.
B) If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.
C) Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.
D) If a firm has a positive free cash flow, then it must have either a zero or a negative AFN.
E) Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase.
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Chapter 13: Agency Conflicts and Corporate Governance
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Q1) Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
A) Targeted share repurchases.
B) Shareholder rights provisions.
C) Restricted voting rights.
D) Poison pills.
E) Abnormally high executive compensation.
Q2) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) To enable the firm to borrow at a below-market interest rate.
B) To make it easier to grant stock options to employees.
C) To help prevent a hostile takeover.
D) To help retain valued employees.
E) To increase worker productivity.
Q3) Two important issues in corporate governance are (1)the rules that cover the board's ability to fire the CEO and (2)the rules that cover the CEO's ability to remove members of the board.
A)True
B)False
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Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Q1) Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.
A)True
B)False
Q2) Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased.Their argument is based on the assumption that
A) investors require that the dividend yield and capital gains yield equal a constant.
B) capital gains are taxed at a higher rate than dividends.
C) investors view dividends as being less risky than potential future capital gains.
D) investors value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains.
E) investors are indifferent between dividends and capital gains.
Q3) A reverse split reduces the number of shares outstanding.
A)True
B)False
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Page 16
Chapter 15: Capital Structure Decisions
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) The factors that affect a firm's business risk are affected by industry characteristics and economic conditions. Unfortunately, these factors are generally beyond the control of the firm's management.
B) One of the benefits to a firm of being at or near its target capital structure is that this eliminates any risk of bankruptcy.
C) A firm's financial risk can be minimized by diversification.
D) The amount of debt in its capital structure can under no circumstances affect a company's business risk.
E) A firm's business risk is determined solely by the financial characteristics of its industry.
Q2) Whenever a firm borrows money,it is using financial leverage.
A)True
B)False
Q3) A firm's business risk is largely determined by the financial characteristics of its industry,especially by the amount of debt the average firm in the industry uses.
A)True
B)False
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Chapter 16: Supply Chains and Working Capital Management
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Sample Questions
Q1) An increase in any current asset must be accompanied by an equal increase in some current liability.
A)True B)False
Q2) The company you just started has been offered credit terms of 4/30,net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)
A) 16.05%
B) 16.90%
C) 17.74%
D) 18.63%
E) 19.56%
Q3) Changes in a firm's collection policy can affect sales,working capital,and profits. A)True B)False
Q4) The aging schedule is a commonly used method for monitoring receivables. A)True B)False
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Chapter 17: Multinational Financial Management
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Q1) Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.
A)True
B)False
Q2) If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market,then the forward currency is said to be selling at a discount to the spot rate.
A)True
B)False
Q3) In 1985,a given Japanese imported automobile sold for 1,476,000 yen,or $8,200.If the car still sold for the same amount of yen today but the current exchange rate is 144 yen per dollar,what would the car be selling for today in U.S.dollars?
A) $5.964
B) $8,200
C) $10,250
D) $12,628
E) $13,525
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Q1) If the firm uses the after-tax cost of new debt as the discount rate when analyzing a refunding decision,and if the NPV of refunding is positive,then the value of the firm will be maximized if it immediately calls the outstanding debt and replaces it with an issue that has a lower coupon rate.
A)True
B)False
Q2) The appropriate discount rate to use when analyzing a refunding decision is the after-tax cost of new debt,in part because there is relatively little risk of not realizing the interest savings.
A)True
B)False
Q3) Which of the following is generally NOT true and an advantage of going public?
A) Increases the liquidity of the firm's stock.
B) Makes it easier to obtain new equity capital.
C) Establishes a market value for the firm.
D) Makes it easier for owner-managers to engage in profitable self-dealings.
E) Facilitates stockholder diversification.
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Page 20
Chapter 18: Extension 18 A: Rights Offerings
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Q1) There are 10,000,000 shares outstanding of O'Connell Co.'s stock,which now sells for $50 per share.The company plans to raise $100 million as new equity by selling common stock.Since the preemptive right is in the corporate charter,rights will be used.Management has decided that the rights should be worth $1 each: Such a price would assure that most stockholders would either exercise or sell their rights rather than just letting them expire,yet a careless failure to use the rights would not impose too severe a hardship on anyone.What subscription price should O'Connell set for its offering to obtain the desired price of the rights,and what will be the ex-rights stock price (M<sub>e</sub>),assuming the theoretical relationships hold? (Hint: N = Number of old shares/Number of new shares; Number of new shares = Dollars to be raised/Subscription price per share.)
\(\begin{array}{lll}
& \text { Sub Price } & \text { Ex-rights } \\
\text { a. } & \$ 39.65 & \$ 42.50 \\
\text { b. } & \$ 40.25 & \$ 43.50 \\
\text { c. } & \$ 42.65 & \$ 47.50 \\
\text { d. } & \$ 44.55 & \$ 49.00 \\
\text { e. } & \$ 46.65 & \$ 50.00 \end{array}\)
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Chapter 19: Lease Financing
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Q1) Financial Accounting Standards Board (FASB)Statement #13 requires that for an unqualified audit report,financial (or capital)leases must be included in the balance sheet by reporting the
A) residual value as a liability.
B) present value of future lease payments as an asset and also showing this same amount as an offsetting liability.
C) undiscounted sum of future lease payments as an asset and as an offsetting liability.
D) undiscounted sum of future lease payments, less the residual value, as an asset and as an offsetting liability.
E) residual value as a fixed asset.
Q2) A leveraged lease is more risky from the lessee's standpoint than an unleveraged lease.
A)True B)False
Q3) A sale and leaseback arrangement is a type of financial,or capital,lease.
A)True B)False
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Chapter 20: Hybrid Financing: Preferred Stock, warrants, and Convertibles
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Q1) Most convertible securities are bonds or preferred stocks that,under specified terms and conditions,can be exchanged for common stock at the option of the holder.
A)True
B)False
Q2) A detachable warrant is a warrant that can be detached and traded separately from the bond with which it was issued.Most traded warrants are originally attached to bonds or preferred stocks.
A)True
B)False
Q3) A warrant holder is not entitled to vote,but he or she does receive any cash dividends paid on the underlying stock.
A)True
B)False
Q4) Firms generally do not call their convertibles unless the conversion value is greater than the call price.
A)True
B)False
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Chapter 21: Dynamic Capital Structures
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Q1) Which of the following statements concerning the MM extension with growth is NOT CORRECT?
A) The value of a growing tax shield is greater than the value of a constant tax shield.
B) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.
C) For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions.
D) The total value of the firm is independent of the amount of debt it uses.
E) The tax shields should be discounted at the unlevered cost of equity.
Q2) According to MM,in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.
A)True
B)False
Q3) When a firm has risky debt,its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.
A)True
B)False
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Page 24
Chapter 22: Mergers and Corporate Control
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Q1) Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new subsidiary separately could be described as primarily a financial merger.
A)True
B)False
Q2) Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.
A)True
B)False
Q3) The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.
A)True B)False
Q4) Since the primary rationale for any operating merger is synergy,in planning such mergers,the development of accurate pro forma cash flows is the single most important action.
A)True B)False
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Chapter 23: Enterprise Risk Management
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Q1) Suppose the December CBOT Treasury bond futures contract has a quoted price of 80'07.If annual interest rates go up by 1.00 percentage point,what is the gain or loss on the futures contract? (Assume a $1,000 par value,and round to the nearest whole dollar.)
A)-$78.00
B) -$82.00
C) -$86.00
D) -$90.00
E) -$95.00
Q2) Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss,while pure risks are those that can only lead to losses.
A)True
B)False
Q3) The two basic types of hedges involving the futures market are long hedges and short hedges,where the words "long" and "short" refer to the maturity of the hedging instrument.For example,a long hedge might use Treasury bonds,while a short hedge might use 3-month T-bills.
A)True
B)False
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Chapter 24: Bankruptcy, reorganization, and Liquidation
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Q1) A central question that must be addressed in bankruptcy proceedings is whether the firm's inability to meet scheduled interest payments results from a temporary cash flow problem or from a potentially permanent problem caused by falling asset values.
A)True
B)False
Q2) The basic doctrine of fairness under bankruptcy provisions states that claims must be recognized in the order of their legal and contractual priority.
A)True
B)False
Q3) Even if a firm's cash flow projections indicate that it will soon be unable to meet its interest payments,a bankruptcy case cannot begin until the firm actually defaults on a scheduled payment.
A)True
B)False
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Chapter 25: Portfolio Theory and Asset Pricing Models
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Q1) Which of the following statements is CORRECT?
A) The characteristic line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry.
B) The slope of the characteristic line is the stock's standard deviation.
C) The distance of the plot points from the characteristic line is a measure of the stock's market risk.
D) The distance of the plot points from the characteristic line is a measure of the stock's diversifiable risk.
E) "Characteristic line" is another name for the Security Market Line.
Q2) Security A has an expected return of 12.4% with a standard deviation of 15%,and a correlation with the market of 0.85.Security B has an expected return of -0.73% with a standard deviation of 20%,and a correlation with the market of -0.67.The standard deviation of r<sub>M</sub> is 12%.
A) To someone who acts in accordance with the CAPM, which security is more risky, A or B? Why? (Hint: No calculations are necessary to answer this question; it is easy.)
B) What are the beta coefficients of A and B? Calculations are necessary.
C) If the risk-free rate is 6%, what is the value of r<sub>M</sub>?
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Chapter 26: Real Options
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Q1) Which of the following is NOT a real option?
A) The option to buy shares of stock if its price goes up.
B) The option to expand into a new geographic region.
C) The option to abandon a project.
D) The option to switch the type of fuel used in an industrial furnace.
E) The option to expand production if the product is successful.
Q2) Real options affect the size,but not the risk,of a project's expected cash flows.
A)True
B)False
Q3) Real options are options to buy real assets,like stocks,rather than interest-bearing assets,like bonds.
A)True
B)False
Q4) The option to abandon a project is a real option,but a call option on a stock is not a real option.
A)True
B)False
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Chapter 27: Providing and Obtaining Credit
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29 Verified Questions
29 Flashcards
Source URL: https://quizplus.com/quiz/24949
Sample Questions
Q1) The collection process,although sometimes difficult,is a fairly inexpensive component of doing business.
A)True
B)False
Q2) The percentage aging schedule of accounts receivable is the most robust way to see if customers are,on average,paying more slowly,because it is unaffected by seasonal changes in sales.
A)True
B)False
Q3) Maxwell Gardens requires a $100,000 annual loan in order to pay laborers to tend and harvest its organic vegetable crop.Maxwell borrows on a discount interest basis at a nominal annual rate of 11 percent.If Maxwell must actually receive $100,000 net proceeds to finance its crop,then what must be the face value of the note?
A) $111,000
B) $100,000
C) $112,360
D) $89,000
E) $108,840
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Chapter 28: Advanced Issues in Cash Management and Inventory Control
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Source URL: https://quizplus.com/quiz/24950
Sample Questions
Q1) Which of the following is true of the EOQ model? Note that the optimal order quantity,Q,will be called EOQ.
A) If the annual sales, in units, increases by 20%, then EOQ will increase by 20%.
B) If the average inventory increases by 20%, then the total carrying costs will increase by 20%.
C) If the average inventory increases by 20% the total order costs will increase by 20%.
D) The EOC is the same for all companies.
E) If the fixed per order cost increases by 20%, then EOQ will increase by 20%.
Q2) For some firms,holding highly liquid marketable securities is a substitute for holding cash because a marketable securities portfolio can accomplish the same objective as cash.
A)True
B)False
Q3) The easier a firm's access to borrowed funds the higher its precautionary balances will be,in order to protect against sudden increases in interest rates.
A)True
B)False
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Page 31
Chapter 29: Pension Plan Management
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Source URL: https://quizplus.com/quiz/24951
Sample Questions
Q1) Which of the following statements about defined contribution plans is incorrect?
A) In general, employees can choose the investment vehicle under a defined contribution plan. Thus, highly risk-averse employees can choose low-risk investments, while more risk-tolerant employees can choose high-risk investments.
B) In a defined contribution plan, the employer must make larger-than-average contributions to the pension plan when investment returns have been below expectations.
C) Defined benefit plans are used more often by large corporations than by small companies.
D) The PBGC insures a portion of pension benefits.
E) A defined contribution plan places the risk of poor pension portfolio performance on the employee.
Q2) The performance measurement of stock portfolio managers must recognize the risk inherent in the investment portfolio.One way to incorporate risk into performance measurement is to examine the portfolio's alpha,which measures the vertical distance of the portfolio's return above or below the Security Market Line.
A)True
B)False
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Chapter 30: Financial Management in Not For Profit
Businesses
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Sample Questions
Q1) Not-for-profit firms have fund capital in place of equity capital.Since fund capital does not have to provide a return to stockholders,the appropriate cost of fund capital in a cost of capital estimate is zero.
A)True
B)False
Q2) Which of the following statements about a not-for-profit firm's cost of capital estimate is most correct?
A) The capital structure weights for a not-for-profit firm are set at 50/50, because such firms can raise $1 of debt financing for each dollar of retained earnings.
B) The cost of tax-exempt debt issued by not-for-profit firms is increased ("grossed up") by 1 - T in the WACC estimate to reflect the fact that such firms do not pay taxes.
C) Equity (fund) capital has a cost that is roughly equivalent to the cost of retained earnings to similar investor-owned companies.
D) Not-for-profit firms have a zero cost of capital.
E) Since a not-for-profit firm has no shareholders, its WACC estimate does not include a cost of equity (fund capital) estimate.
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