Cost of Capital

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

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.

When computing the adjusted cash flow from assets, the tax amount is calculated as:

EBIT(TC).

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 regarding the weighted average cost of capital is accurate?

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

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.

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.

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 .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.

Incorporating flotation costs into the analysis of a project will:

increase the initial cash outflow of the project.

Assume a firm's flotation costs are 7.8 percent of the funding need. Accordingly, when analyzing capital projects, the firm's managers should:

increase the initial project cost by dividing that cost by (1 − .078).

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.

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 cost of capital, the most important determinant is the:

use of the funds raised.