Ch. 12

Which one of these will increase a firm's after tax cost of debt?

A decrease in the firm's tax rate

Which of the following is true of asset betas?

Businesses that are less sensitive to market and economic conditions tend to have lower asset betas than more cyclical industries

A firm's cost of capital:

Depends upon how the funds raised are going to be spent

T/F: Accounts payable is a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting

False

Generally, you would expect the beta of debt for a firm to be

Near zero

Why should firms that own and operate multiple businesses that have different risk characteristics use business - specific, or divisional costs of capital?

Not all lines of business have equal risk and it is likely that the firm will accept projects whose returns are unacceptably low in relation to the risk involved.

Two firms have the same asset beta but different equity betas. The direct cause is likely:

The firms have different proportions of debt relative to equity

T/F: The presence of debt creates financial leverage

True

The average of a firm's cost of equity and after tax cost of debt that is weighted based on the firm's capital structure is called the:

Weighted average cost of capital.

The weighted average cost of capital for a wholesaler:

is the return investors require on the total assets of the firm

The firm's unlevered (asset) beta is:

the weighted average of the equity beta and the debt beta.