BADM 310 Ch 14
Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firm's cost of equity?
A decrease in the firm's beta
When calculating a firm's weighted average cost of capital, the capital structure weights:
are based on the market values of the outstanding securities.
Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the:
cost of debt
Okonjo Economics has a debt-equity ratio of .38. All of the firm's outstanding shares were purchased by a small number of investors. The return these investors require is called the:
cost of equity.
Assume a firm has a debt-equity ratio of .36. The firm's cost of equity:
is affected by both a change in the firm's beta and the firm's projected rate of growth.
Assume Barnes' Boots has a debt-equity ratio of .52. The firm uses the capital asset pricing model to determine its cost of equity. Accordingly, the firm's estimated cost of equity:
is dependent upon a reliable estimate of the market risk premium.
To determine a firm's cost of capital, one must include:
the returns currently required by both debtholders and stockholders.
The flotation cost for a company is computed as:
the weighted average of the flotation costs associated with each form of financing.
When determining a firm's cost of capital, the most important determinant is the:
use of the funds raised.
Flotation costs for a levered firm should be:
weighted and included in the initial cash flow.
Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $3.36 per share and has a beta of 1.38, all else constant, which of the following actions will increase the firm's cost of equity?
A decrease in the risk-free rate
With respect to evaluating capital projects, which of the following statements is accurate?
A project that is unacceptable today might be acceptable tomorrow given a change in market returns.
Which of the following statements regarding the cost of preferred stock is accurate?
It equals the dividend yield.
Which of the following statements regarding a firm's pretax cost of debt is accurate?
It is based on the current yield to maturity of the company's outstanding bonds.
Which of the following statements regarding the aftertax cost of debt is accurate?
It is highly dependent upon a company's tax rate.
Which of the following statements is accurate regarding the dividend growth model?
It is only as reliable as the estimated rate of growth.
Which of the following statements regarding the weighted average cost of capital is accurate?
It is the return investors require on the total assets of the firm.
When using the subjective approach to project analysis, a firm:
assigns discount rates to projects based on the discretion of the senior managers of a firm.
Incorporating flotation costs into the analysis of a project will:
increase the initial cash outflow of the project.
When computing the adjusted cash flow from assets, the tax amount is calculated as:
EBIT(TC).
Assume a firm employs debt in its capital structure. Which of the following statements is accurate?
The WACC would most likely decrease if the firm replaced its preferred stock with debt.
Assume a manager determines the cost of capital for a specific project based on the cost of capital at another firm with a line of business that is similar to the project. Accordingly, the manager is using the ________ approach.
pure play
With respect to capital project analysis, which of the following statements is accurate?
Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.
The capital structure of Pendekanti Products is 58 percent common stock, 2 percent preferred stock, and 40 percent debt. The firm maintains a dividend payout ratio of 24 percent, has a beta of 1.08, and has an income tax rate of 21 percent. Given this information, which one of the following statements is accurate?
The cost of equity is unaffected by a change in the company's tax rate.
Which of the following is the main advantage of using the dividend growth model to estimate a firm's cost of equity?
The simplicity of the model.
When valuing an entire firm using the cash flow from assets approach, why must the tax amount be adjusted?
The tax effect of the interest expense must be removed.
Velasquez Manufacturing has two vastly different lines of business: Alpha and Omega. The Alpha line is the riskiest of the two, and accounts for 72 percent of the firm's sales. When deciding which project proposals should be accepted, the managers should:
assign appropriate, but differing, discount rates to each business line and then select the projects with the highest net present values.
When utilizing the capital asset pricing model approach to value equity, the outcome:
assumes the reward-to-risk ratio is constant.
When evaluating capital project proposals, assume a firm assigns unique discount rates based on the risk level of each project. Accordingly the:
company's overall cost of capital may increase or decrease over time.
A firm's aftertax cost of debt will increase if there is a(n):
decrease in the company's tax rate.
When evaluating any capital project proposal, the cost of capital:
depends upon how the funds raised for that project are going to be spent.
Assume a firm has a debt-equity ratio of .48. The firm's cost of equity is:
directly related to the risk level of the firm.
Assume a firm utilizes its WACC as the discount rate for every capital project it implements. Accordingly, the firm will tend to:
increase the average risk level of the company over time.
Thornton Homes has multiple divisions which operate as separate lines of business and face risks unique to those lines. The firm uses its overall WACC as the discount rate to evaluate all proposed projects. Accordingly, each division within the firm will tend to:
prefer higher risk projects over lower risk projects.
Assume a firm has a debt-equity ratio of .62. The firm's weighted average cost of capital is the:
rate of return a company must earn on its existing assets to maintain the current value of its stock.
The cost of preferred stock is equivalent to the:
rate of return on a perpetuity.
For any given capital project proposal, the discount rate should be based on the:
risks associated with the use of the funds required by the project.
When determining a firm's weighted average cost of capital, the item with the least amount of impact is the:
standard deviation of the company's common stock.
