Ch. 14 Learnsmart

Which of the following are true?

1. Book values are often similar to market values for *debt* 2. We should use market values in the WACC

A company can deduct interest paid on debt when computing taxable income

Dividends are not tax deductible

If a firm uses its overall cost of capital to discount cash flows from higher risk projects, it will accept _____ projects

Too many high risk-risk

The best way to include flotation costs is to

add them to the initial investment

The discount rate for the firm's projects equals the cost of capital for the firm as a whole when...

all projects have the same risk as the current firm

Economic Value Added (EVA) uses the weighted average cost of capital to determine if value is:

being created or destroyed

The SML approach requires estimates of:

beta coefficient market risk premium

Flotation costs are costs incurred to

bring new security to the market

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

equal to

In reality, most firms cover the equity portion of their capital spending with....

internally generated cash flows

The WACC is the minimum return a company needs to earn to satisfy:

its bondholders its stockholders

If the firm had so much debt that its equity was valueless, its average cost of capital would equal

its cost of debt

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

pure plays

A project should only be accepted if its return is above what is...

required by investors

The cost of capital is an appropriate name since a project must earn enough to pay those who ____ the capital

supply

WACC should be used when...

the project's risk is the same as the average risk of the firms current projects

According to CAPM, what is the expected return on a stock if its beta is equal to 0

the risk-free rate

To estimate the growth rate of a particular stock, we can

1. Use the historical dividend growth rate 2. use security analysts' forecasts

A firm's cost of debt can be...

1. obtained by checking yields on publicly traded bonds 2. obtained by talking to IB 3. estimated easier than the cost of equity

Rate used to discount project cash flows is known as the

1. Cost of Capital 2. Discount Rate 3. Required rate

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

1. Dividends to common holders are *NOT* fixed 2. Dividends to preferred holders *ARE* fixed

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

1. Risk-free rate 2. Stock's beta 3. market risk premium

The growth rate of dividends can be found using:

1. Security analysts' forecast 2. Historical dividend growth rates

Which of the following methods for calculating cost of equity ignores risk? A. CAPM B. Dividend growth model C. YTM

B. Dividend Growth Model

Dividends paid to common stockholders _____ be deducted from the payer's taxable income for tax purposes

cannot

If an all-equity firm discounts a project's cash flows with the firm;s overall WACC even though the project's beta is less than the firm's overall beta, it is possible the project might be:

rejected, when it should be accepted

An important advantage of a firm raising equity internally is not having to pay

flotation costs