Finance Ch.12

Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC?

Cost of equity

Which of the following will increase the cost of equity for a firm with a beta of 1.1? I. Decrease in the security's beta II. Decrease in the market risk premium III. Decrease in the risk-free rate IV. Increase in the risk-free rate

III only

Which one of the following will decrease the aftertax cost of debt for a firm?

Increase in tax rates

Which one of the following will increase the cost of equity, all else held constant?

Increase in the dividend growth rate

weighted average cost of capital?

Increase in the market value of the firm's common stock

All else constant, an increase in a firm's cost of debt:

will result in an increase in the firm's cost of capital

All else constant, which of the following will increase the aftertax cost of debt for a firm? I. Increase in the yield to maturity of the firm's outstanding debt II. Decrease in the yield to maturity of the firm's outstanding debt III. Increase in the firm's tax rate IV. Decrease in the firm's tax rate

I and IV only

Ted is trying to decide what cost of capital he should assign to a project. Which one of the following should be his primary consideration in this decision?

Risk level of the project

Which one of the following statements is correct?

The cost of preferred stock is unaffected by the issuer's tax rate

Which one of the following is the pretax cost of debt?

Weighted average yield to maturity on the firm's outstanding debt

Lester lent money to The Corner Store by purchasing bonds issued by the store. The rate of return that he and the other lenders require is referred to as the:

cost of debt

The weighted average cost of capital is defined as the weighted average of a firm's:

cost of equity and its aftertax cost of debt