FRL3000 Ch 14 Connect study set

If the market value of debt is $45 million and the market value of equity is $105 million, the total firm value is __________ million.

$150

A firm needs to sell enough equity to raise $950,000 after covering the flotation costs of 5 percent. How much will it pay in flotation costs?

$50,000

What are the aftertax earnings for HIJ corporation if it reports $200 in revenue, $90 in operating expenses, has a tax rate of 21% and pays $20 in interest on its bonds?

$71.10

ULC and LEV have earning before interest and taxes of $110. LEV has $20 of interest expense. Both companies are taxed at 21 percent, ULC's aftertax earnings are ________ , which is than LEV's aftertax earnings.

$86.9;15.8 greater

A firm has 20 percent debt, debt flotation costs of 5 percent, equity flotation costs of 10 percent and want to raise $9,100, not including flotation costs. what are the flotation costs?

$900

A projects NPV without floatation costs is $1,000,000 and the flotation costs are $50,000. What is the true NPV?

$950,000

Including preferred stock in the WACC formula adds which term

(P/V)*Rp

Preferred stock _______________.

- Pays a constant dividend. - Pays dividends in perpetuity

The WACC is the minimum return a company needs to earn to satisfy ____________.

- its stockholders - its bondholders

The growth rate of dividends can be found using:

- security analysts' forecasts - historical dividend growth rates

A firm has a target debt-debt equity ratio of 0.5, but it plans to finance a new project with all debt. What debt equity ratio should be used when calculating the projects flotation costs?

0.5

If a preferred stock pays a dividend of $2 per year and is selling for $20, its yield is

10%

A company has a borrowing rate of 15% and a tax rate of 21 percent. What is the aftertax cost of debt?

11.85%

Suppose the risk-free rate is 5 percent, the market rate of return is 10 percent, and beta is 2. Find the required rate of return using the CAPM

15%

If an all-equity firm's beta is 2, the risk-free rate is 3%, and the historical market risk premium is 7%, what is the firm's cost of capital?

17% Re=3%+2*%

WACC was used to compute the following project NPVs: Project A = $100, Project B = -$50, Project C = -$10, Project D = $40. Which project should the firm accept?

A and D

Flotation costs are costs incurred to ________.

Bring new security issues to the market

The CAPM formula is:

E (Re)=Rf + B (E(Rm) -Rf)

The market risk premium is defined as __________.

RM-Rf

Which of the following methods for calculating the cost of equity ignores risk?

The dividend growth model

T/F:Econmic value added (EVA) is a mean of evaluating corporate performance.

True

Which of the following is true?

Under U.S. tax law, a corporation's interest payments are tax deductible.

B = the market value of a firm's debt; S = the market value of that same firm's equity; RB = the before-tax yield on the firm's debt; TC = the corporate tax rate; RS = the cost of equity. Given the definitions above, the weighted average cost of capital formula can be written as:

[S/(S+b)]RS+[B/(S+B)]RS*(1-TC)

If a firm has multiple projects, each project should be discounted using ___.

a discount rate that commensurates with the projects risks

The discount rate for the firms project equals the cost of capital for the firm as a whole when ________.

all projects have the same risk as the current firm

Which of the following are components used in the construction of WACC?

cost of common stock cost of preferred stock cost of debt

To apply the dividend growth model to a particular stock, you need to assume that the firms _______ will grow at a constant rate.

dividend

One method for estimating the cost of equity is based on the ______ model.

dividend growth

The return an investor in a security receives is _________ _________ the cost of the security to the company that issued it.

equal to

An important advantage to a firm raising equity internally is not having to pay _______.

flotation costs

In reality, most firms cover the equity portion of their capital spending with _________.

internally generated cash flow

If a firm issues no debt, its average cost of capital will equal ____.

its cost of equity

Other companies that specialize only in projects similar to the project your firm is considering are called _____.

pure plays

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:

rejected, when it should be accepted.

A project should only be accepted if its return is above what is ______.

required by investors

To estimate a firms equity cost of Capital using CAPM we need to know

stocks beta risk free rate market risk premium

Finding a firm's overall cost of equity is difficult because:

there is no way of directly observing the return that the firms equity investors require on their investment.

If a firm uses its overall cost of capital to discount cash flows from projects in higher risk divisions, it will accept ____ projects.

too many high risk

What does WACC stand for?

weighted average cost of capital

A good source for bond quotes is:

www.finra.org/marketdata

The most appropriate weights to use in the WACC are the ______ weights.

market value

The best way to include flotation costs is to ___________.

Add them to the initial investment

Some risk adjustment to a firm's WACC for projects of differing risk, even if it is subjective, is probably:

better than no risk adjustment

The rate used to discount project cash flows is known as the

required return discount rate cost of capital

A firm's cost of debt can be

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

A firms capital structure consists of 40 percent debt and 60 percent equity. The aftertax yield on debt is 2.5 percent and the cost of equity is 15%. The project is about as risky as the overall firm. What discount rate should be used to estimate the projects net present value?

10%

If an analyst's forecast for a firm's earnings growth is 7%, and its dividend yield is 3%, its cost of equity will be _____.

10% cost of equity= dividend yield + growth rate

A firms capital structure consists of 30 percent debt and 70 percent equity. Its bonds yield 10 percent, pretax, its cost of equity is 16 percent, and the tax rate is 21 percent, what is its WACC?

13.57%

If an all-equity firm's beta is 2, the risk-free rate is 3%, and the historical market risk premium is 7%, what is the firm's cost of capital?

17%

The SML approach requires estimates of:

beta coefficient the market risk premium

Which of the following are tax-deductible to the firm?

coupon interest paid on bonds

Sigma Corporation consists of two divisions: A and B. Division A is riskier than Division B. If Sigma Corporation uses the firm's overall WACC to evaluate both Division's projects, which Division will probably not receive enough resources to fund all of its potentially profitable projects?

division B

The CAPM can be used to estimate the ________.

required return on equity

Which of the following is true?

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