BA 360 Intro to Financial Management- Ch 14

What can we say about the dividends paid to common and preferred stockholders? - Dividends to preferred stockholders are fixed. - Dividends to common stockholders are not fixed. - Preferred stock dividends change every year based on the earnings of the firm. - Dividends are guaranteed for both preferred and common stockholders.

- Dividends to preferred stockholders are fixed. - Dividends to common stockholders are not fixed.

A stock with an actual return that lies above the security market line has: a return equivalent to the level of risk assumed. more systematic risk than the overall market. more risk than that warranted by CAPM. less systematic risk than the overall market. a higher return than expected for the level of risk assumed.

a higher return than expected for the level of risk assumed.

Which of the following are true? - Book values are often similar to market values for debt. - Ideally, we should use market values in the WACC. - Book values are often similar to market values for equity. - Ideally, we should use book values in the WACC.

- Book values are often similar to market values for debt. - Ideally, we should use market values in the WACC.

Which of the following are components used in the construction of the WACC? - Cost of common stock - Cost of accounts payable - Cost of preferred stock - Cost of debt

Cost of common stock Cost of preferred stock Cost of debt

True or false: Projects should always be discounted at the firm's overall cost of capital.

False: Projects' discount rates should reflect their particular level of risk.

Which one of the following will decrease the net present value of a project? - Increasing the project's initial cost at time zero - Decreasing the required discount rate - Increasing the value of each of the project's discounted cash inflows - Increasing the amount of the final cash inflow - Moving each cash inflow forward one time period, such as from Year 3 to Year 2

Increasing the project's initial cost at time zero

Which of the following variables is not required to calculate the expected return on a risky asset? The stock's beta The market risk premium The risk-free rate The rate of inflation

The rate of inflation

True or false: The return an investor in a security receives is equal to the cost of the security to the company that issued it.

True

If a firm has multiple projects, each project should be discounted using: - the firm's overall cost of capital. - the marginal cost of capital for the latest project. - a discount rate that commensurates with the project's risk. - the average cost of capital.

a discount rate that commensurates with the project's risk.

o apply the dividend growth model to a particular stock, you need to assume that the firm's ___ will grow at a constant rate. dividend beta profitability debts

dividend

True or false: The cost of debt on the market value basis is typically much higher than the cost of debt on the book value basis.

false

The most appropriate weights to use in the WACC are the ______ weights. government mandated book value salvage value market value

market value

The market value cost of debt is often Blank______ the book value cost of debt. similar to higher than lower than

similar to

firm's overall cost of capital will include both its cost of _______ capital and equity capital.

debt

The reward-to-risk ratio for Stock A is less than the reward-to-risk ratio of Stock B. Stock A has a beta of .82 and Stock B has a beta of 1.29. This information implies that: - both Stock A and Stock B are correctly priced since Stock A is less risky than Stock B. - either Stock A is overpriced or Stock B is underpriced or both. - either Stock A is underpriced or Stock B is overpriced or both. - Stock A is less risky than Stock B and both stocks are fairly priced. - Stock A is riskier than Stock B and both stocks are fairly priced.

either Stock A is overpriced or Stock B is underpriced or both

Jenner's is a multi-division firm that uses its overall WACC as the discount rate for all proposed projects. Each division is in a separate line of business and each presents risks unique to those lines. Given this, a division within the firm will tend to: - receive less project funding if its line of business is riskier than that of the other divisions. - have an equal probability with all the other divisions of receiving funding. - prefer higher risk projects over lower risk projects. - avoid risky projects so it can receive more project funding. - become less risky over time based on the projects that are accepted.

prefer higher risk projects over lower risk projects.

If an all-equity firm discounts a project's cash flows with the firm's overall weighted average cost of capital even though the project's beta is less than the firm's overall beta, it is possible that the project might be _____. - accepted, as it should be - rejected, as it should be - rejected, when it should be accepted - accepted, when it should be rejected

rejected, when it should be accepted

inding a firm's overall cost of equity is difficult because _____. - there is no way to estimate it it extensively requires the use of differential equations - there is no way of directly observing the return that the firm's equity investors require on their investment - the federal government refuses to disclose equity costs unless the firm is in the real estate sector

there is no way of directly observing the return that the firm's equity investors require on their investment

If a firm uses its overall cost of capital to discount cash flows from higher risk projects, it will accept ______ projects. the optimal number of only profitable too many high-risk

too many high-risk

If a firm uses its overall cost of capital to discount cash flows from higher risk projects, it will accept ______ projects.. too many high-risk only profitable the optimal number of

too many high-risk

MNO preferred stock pays a dividend of $2 per year and has a price of $20. If MNO's tax rate is 21 percent, the required rate of return on its preferred stock is found by which formula? $20/.21 $2/.21 $2/$20 $20 - $2

$2/$20

Including preferred stock in the WACC adds the term: (V/P) × RP (P/V) × RP [P/(E + D)] × RP

(P/V) × RP

Which of the following are true? - Ideally, we should use book values in the WACC. - Book values are often similar to market values for debt. - Ideally, we should use market values in the WACC. - Book values are often similar to market values for equity.

- Book values are often similar to market values for debt. - Ideally, we should use market values in the WACC.

A firm's cost of debt can be ___. - obtained by talking to investment bankers - calculated using the dividend growth model - estimated easier than its cost of equity - obtained by checking yields on publicly traded bonds

- obtained by talking to investment bankers - estimated easier than its cost of equity - obtained by checking yields on publicly traded bonds

Which one of the following will decrease the net present value of a project? Increasing the amount of the final cash inflow Increasing the value of each of the project's discounted cash inflows Moving each cash inflow forward one time period, such as from Year 3 to Year 2 Increasing the project's initial cost at time zero Decreasing the required discount rate

Increasing the project's initial cost at time zero

A company's weighted average cost of capital: - should be used as the required return when analyzing any new project. - is equivalent to the aftertax cost of the outstanding liabilities. - is unaffected by changes in corporate tax rates. - is the return investors require on the total assets of the firm. - remains constant when the debt-equity ratio changes.

Is the return investors require on the total assets of the firm.

The formula for calculating the cost of equity capital that is based on the dividend discount model is: RE = D1/P0 + g RE = D1/P0 - g RE = D0/P1 + g RE = (D1/P0)/g

RE = D1/P0 + g

When discounting the cash flows of a project at the WACC to estimate NPV, we need to find an alternative in the financial markets that is _____ as the given project. half as risky twice as risky in the same risk class the exact same

in the same risk class

The WACC is the minimum return a company needs to earn to satisfy _____. It's stockholders it's bondholders the exchange on which it's stock is traded the SEC

stockholders bondholders

Capital_____weights can be interpreted just like portfolio weights.

structure

With the use of the _____ approach to estimating WACC, the firm's WACC may change through time as economic conditions change.

subjective

The cost of capital depends on the _____ of funds, not the _____ of funds. use; inflation use; source source; use

use; source

The cost of ______ can be observed because it is the interest rate the firm must pay on new loans. Listen to the complete question

debt

Preferred stock ___. pays dividends in perpetuity pays a constant dividend does not pay dividends has a fixed maturity

pays dividends in perpetuity pays a constant dividend

Other companies that specialize only in projects similar to the project your firm is considering are called ___. pure plays matched pairs knock-offs comparables

pure plays

Which of the following are components used in the construction of the WACC? Cost of accounts payable Cost of common stock Cost of preferred stock Cost of debt

Cost of common stock Cost of preferred stock Cost of debt

The______ ________ approach is the use of a WACC that is unique to a particular project, based on companies in similar lines of business.

pure play