Finance Final Exam MC

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

The cost of capital depends primarily on the source of the funds, not the use.

FALSE

The coupon rate on the firm's outstanding debt can be used as a substitute for the cost of debt.

FALSE

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.

For the Dividend Growth Model, the equation can be written as follows: P0 = =D1/(RE - g). How can this equation be rearranged?

RE = D1/P0 + g

Since preferred stock has a fixed dividend paid every period forever, it is essentially a perpetuity.

TRUE

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.

A firm's target capital structure represents:

a fixed debt-equity ratio that the company attempts to maintain

Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the:

cost of debt.

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.

When evaluating any capital project proposal, the cost of capital:

depends upon how the funds raised for that project are going to be spent.

The required return of preferred stock is equal to the ________ ________ on the preferred stock.

dividend yield

The percent of investment that the project costs can be referred to as all of the following, except:

free cash flow

To determine a firm's cost of capital, one must include:

the returns currently required by both debtholders and stockholders.