FNAN 300 Chapter 12 Connect Learnsmart

Including preferred stock in the WACC formula adds which term if P is the market value of preferred stock and R(v)P is the cost of preferred?

(P/V) x R(v)P

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 percent and a tax rate of 30 percent. What is its aftertax cost of debt?

10.5% = 15% x (1-0.3)

A firm's 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 40 percent. What is its WACC?

13%

If the risk-free rate is 4 percent, an all-equity firm's beta is 2, and the market risk premium is 6 percent, what is the firm's cost of capital

16% = 4 + 2 x 6

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

A and D

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

equal to

To estimate the dividend yield of a particular stock, we need:

forecasts of the dividend growth rate,g; the current stock price; and the last dividend paid, D0

The growth rate of dividends can be found using:

historical dividend growth rates and security analysts' forecasts

Which of the following are true?

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

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

The WACC is the overall ________________ the firm must earn on its existing assets to maintain the _______________ of its stock.

return; value

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

too many

What will happen over time if a firm uses its overall WACC to evaluate all projects, regardless of each project's risk level?

it will accept projects that it should have rejected, the firm overall will become riskier, and it will reject projects that it should have accepted

SmartKids, a textbook publisher, is considering investing in a software company that collects and stores data. What beta should SmartKids use to assess the risk of the project?

the beta for software companies that collect and store data

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

WACC is used to discount ______________ _______________.

cash flows

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

cost of capital, required return, and discount rate

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

cost of preferred stock, cost of common stock, and cost of debt

The dividend growth model is applicable to companies that pay ______________.

dividends

What can we say about the dividends paid to common and preferred stockholders?

dividends to common stockholders are not fixed and dividends to preferred stockholders are fixed

If the firm is all-equity, the discount rate is equal to the firm's cost of _______________ capital.

equity

Components of the WACC include funds that come from _____________.

investors

Which of the following is true about a firm's cost of debt?

it is easier to estimate than the cost of equity and yields can be calculated from observable data

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

market value

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

pure plays

To estimate a firm's equity cost of capital using the CAPM, we need to know the _____________.

risk-free rate, market risk premium, and stock's beta

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

use; source