Chapter 11
Which phrase makes this a true statement? Ideally, when searching for a beta for a new line of business
All the answers make this a true statement.
Which of the following statements is true?
Preferred stock represents a special case of the constant growth model, wherein the g equals zero
Which of the following statements is true?
Preferred stock represents a special case of the constant growth model, wherein the g equals zero.
Which of these statements is false?
The objective approach to computing the divisional WACC uses a simple average beta of projects in each division to calculate the WACC.
Which of the following is a true statement?
To estimate the before-tax cost of debt, we need to solve for the Yield to Maturity (YTM) on the firm's existing debt.
These are fees paid by firms to investment bankers for issuing new securities.
floatation costs
When calculating the weighted average cost of capital, weights are based on
market values.
B24&Co stock has a beta of 1.5, the current risk-free rate is 3, and the expected return on the market is 10.5 percent. What is B24&Co's cost of equity?
14.25%
J&Co stock has a beta of 1.3, the current risk-free rate is 4, and the expected return on the market is 14.5 percent. What is J&Co's cost of equity?
16.35%
This is an estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division.
Divisional WACC
Which of the following statements is true?
If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital.
Which of these statements is true regarding calculating weights for WACC?
If we are calculating WACC for the firm, then equity, preferred stock and debt would be the entire market value of each source of capital.
Which of the following is a true statement regarding the appropriate tax rate to be used in the WACC?
One would use the weighted average of the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction.
Which of these statements is true regarding Divisional WACC?
Using a simple firm-wide WACC to evaluate new projects would give an unfair advantage to projects that present more risk than the firm's average beta.
Which of these is the basic intuition behind calculating the cost of capital?
When firms use multiple sources of capital, they need to calculate the appropriate interest rate for valuing their firm's cash flows as a weighted average of the capital components.
An objective approach to calculating divisional WACCs would be done by
computing the average beta per division, use these figures for each division in the CAPM formula, and then construct divisional WACCs.
Which of these completes this statement to make is a true phrase? The constant growth model is
only going to be appropriate for the limited number of stocks that just happen to expext constant growth.
An average of which of the following will give a fairly accurate estimate of what a project's beta will be?
proxy beta
This is a principle of capital budgeting which states that the calculations of cash flows should remain independent of financing.
separation principle
Which statement makes this a false statement? When a firm pays commissions to underwriting firms that floats the issuance of new stock,
the component cost will need to be integrated only for the firm's WACC.
Which of the following makes this a true statement? If the new project does significantly increase the firm's overall risk,
the increased risk will be borne disproportionately by common stockholders.
Which of these makes this a true statement? When determining the appropriate weights used in calculating a WACC, it should reflect
the relative sizes of the total market capitalizations for each kind of security that the firm issues.
Which of these makes this a true statement? The WACC formula
uses the after-tax costs of capital to compute the firm's weighted average cost of debt financing.
