finance chapter 12
A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions. By doing so, the firm: A. Automatically gives preferential treatment in the allocation of funds to its riskiest division B. Encourages the division managers to only recommend their most conservative projects C. Maintains the current risk level and capital structure of the firm D. Automatically maximizes the total value created for its shareholders
A
Which of the following statements is FALSE? A. The cost of capital is the minimum required return to compensate financial investors. B. The cost of capital for a project depends primarily on the source of funds. C. The cost of equity is the return required by equity investors given the risk of the cash flows from the firm. D. A firm's WACC reflects the average risk of the existing projects undertaken by the firm.
B
Which of the following statements is FALSE? A. The cost to a firm for capital funding equals the expected return to the providers of those funds B. A firm's cost of capital depends primarily on the source of the funds, not the use C. WACC is affected by market conditions including interest rates, tax rates, and the market risk premium D. A firm's WACC reflects the average risk of the existing projects undertaken by the firm
B
Which of the following statements is FALSE? A. The cost of debt for bonds is the same as the yield implied by their market quoted prices, except when that promised yield is too high due, for example, to the high default probabilities for junk bonds. B. The cost of preferred stock equals its dividend yield as a percent of the current price, rather than the preferred dividend as a percent of its stated liquidating value, which is usually $100. C. Judgment is typically required when estimating the cost of equity, particularly when a company pays no dividends and when its beta estimate is imprecise. D. Due to its lower priority and greater risk, a firm's cost of equity can sometimes be, and often is, less that its after-tax cost of debt.
D
