BADM 310 Exam #3 Quizzes

unsystematic risk

An investor who owns a well-diversified portfolio would consider ________ to be irrelevant.

unsystematic

An unexpected post on social media caused the prices of 22 different companies' stocks to immediately increase by 10 to 15 percent. This occurrence is best described as an example of ________ risk.

is dependent upon a reliable estimate of the market risk premium

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:

portfolio

Buchi owns several financial instruments: stocks issued by seven different companies, plus bonds issued by four different companies. Her investments are best described as a(n):

weighted and included in the initial cash flow.

Flotation costs for a levered firm should be:

risks associated with the use of the funds required by the project

For any given capital project proposal, the discount rate should be based on the:

increase the initial cash outflow of the project

Incorporating flotation costs into the analysis of a project will:

systematic

Most financial securities have some level of ________ risk.

Beta

Of the options listed below, which is the best measure of systematic risk?

cost of equity

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:

security market line

The ________ is a positively sloped linear function that plots securities' expected returns against their betas.

The cost of equity is unaffected by a change in the company's tax rate.

The capital structure of Pendekanti Products is 58 percent common stock, 2 percent preferred stock, and 40 percent debt. The firm maintains a dividend payout ratio of 24 percent, has a beta of 1.08, and has an income tax rate of 21 percent. Given this information, which one of the following statements is accurate?

rate of return on a perpetunity

The cost of preferred stock is equivalent to the:

the weighted average of the flotation costs associated with each form of financing.

The flotation cost for a company is computed as:

10

The majority of the diversifiable risk in a portfolio can be eliminated by owning as few as ________ stocks.

market risk premium

The slope of the security market line is the:

prefer high risk projects over lower risk projects

Thornton Homes has multiple divisions which operate as separate lines of business and face risks unique to those lines. The firm uses its overall WACC as the discount rate to evaluate all proposed projects. Accordingly, each division within the firm will tend to:

risk-free rate

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return.

the returns currently required by both debt holders and stockholders

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

Assign the appropriate, but differing, discount rates to each business line and then select the projects with the highest net present values

Velasquez Manufacturing has two vastly different lines of business: Alpha and Omega. The Alpha line is the riskiest of the two, and accounts for 72 percent of the firm's sales. When deciding which project proposals should be accepted, the managers should:

are based on the market values of the outstanding securities.

When calculating a firm's weighted average cost of capital, the capital structure weights:

EBIT(TC).

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

use of the funds raised

When determining a firm's cost of capital, the most important determinant is the:

standard deviation of the company's common stock

When determining a firm's weighted average cost of capital, the item with the least amount of impact is the:

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

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

company's overall cost of capital may increase or decrease over time

When evaluating capital project proposals, assume a firm assigns unique discount rates based on the risk level of each project. Accordingly the:

standard deviation; beta

________ measures total risk, and ________ measures systematic risk.

It equals the dividend yield

Which of the following statements regarding the cost of preferred stock is accurate?

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

Which of the following statements regarding the weighted average cost of capital is accurate?

directly related to the risk level of the firm

Assume a firm has a debt-equity ratio of .48. The firm's cost of equity is:

beta of 1

A ________ is the market's measure of systematic risk.

decrease in the company's tax rate

A firm's aftertax cost of debt will increase if there is a(n):

assumes the reward-to-risk ratio is constant.

When utilizing the capital asset pricing model approach to value equity, the outcome:

rate of return a company mist earn on its existing assets to maintain the current value of its stock

Assume a firm has a debt-equity ratio of .62. The firm's weighted average cost of capital is the:

increase the average risk level of the company over time

Assume a firm utilizes its WACC as the discount rate for every capital project it implements. Accordingly, the firm will tend to:

Assigns discount rates to projects based on the discretion of the senior managers of a firm.

When using the subjective approach to project analysis, a firm:

it is highly dependent upon a company's tax rate

Which of the following statements regarding the aftertax cost of debt is accurate?

It can be effectively eliminated by portfolio diversification.

Which of the following statements regarding unsystematic risk 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

With respect to capital project analysis, which of the following statements is accurate?

A project that is unacceptable today might be acceptable tomorrow given a change in market returns.

With respect to evaluating capital projects, which of the following statements is accurate?

cost of debt

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

The WACC would most likely decrease if the firm replaced its preferred stock with debt

Assume a firm employs debt in its capital structure. Which of the following statements is accurate?

It is only as reliable as the estimated rate of growth

Which of the following statements is accurate regarding the dividend growth model?

is affected by both a change in the firm's beta and the firm's projected rate of growth

Assume a firm has a debt-equity ratio of .36. The firm's cost of equity:

a decrease in the firms beta

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 risk-free rate

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $3.36 per share and has a beta of 1.38, all else constant, which of the following actions will increase the firm's cost of equity?

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

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

pure play

Assume a manager determines the cost of capital for a specific project based on the cost of capital at another firm with a line of business that is similar to the project. Accordingly, the manager is using the ________ approach.

The tax effect of the interest expense must be removed

When valuing an entire firm using the cash flow from assets approach, why must the tax amount be adjusted?

The simplicity of the model

Which of the following is the main advantage of using the dividend growth model to estimate a firm's cost of equity?

It is based on the current yield to maturity of the company's outstanding bonds.

Which of the following statements regarding a firm's pretax cost of debt is accurate?