Chapter 12 (finance copy)

Aaron's Rentals has 58,000 shares of common stock outstanding at a market price of $36 a share. The common stock just paid a $1.64 annual dividend and has a dividend growth rate of 2.8 percent. There are 12,000 shares of 6 percent preferred stock outstanding at a market price of $51 a share. The preferred stock has a par value of $100. The outstanding bonds mature in 17 years, have a total face value of $750,000, a face value per bond of $1,000, and a market price of $1,011 each. The bonds pay 8 percent interest, semiannually. The tax rate is 34 percent. What is the firm's weighted average cost of capital?

7.74 percent

Stock in ABC Enterprises has a beta of 1.06. The market risk premium is 6.8 percent, and T-bills are currently yielding 3.2 percent. ABC's most recent dividend was $1.56 per share, and dividends are expected to grow at a 4 percent annual rate indefinitely. If the stock sells for $43 a share, what is your best estimate of ABC's cost of equity?

9.09 percent

Which one of the following statements is correct, all else held constant?

A decrease in a firm's WACC will increase the attractiveness of the firm's investment options.

Which one of the following statements is correct? Assume the pretax cost of debt is less than the cost of equity.

A firm may change its capital structure if the government changes its tax policies.

Which one of the following statements is accurate for a levered firm?

A reduction in the risk level of a firm will tend to decrease the firm's WACC.

Derek's is a brick-and-mortar toy store. The firm is considering expanding its operations to include Internet sales. Which one of the following would be the best firm to use in a pure play approach to analyzing this proposed expansion?

A toy store that sells online only

Swizer Industries has two separate divisions. Division X has less risk so its projects are assigned a discount rate equal to the firm's WACC minus 0.5 percent. Division Y has more risk and its projects are assigned a rate equal to the firm's WACC plus 1 percent. The company has a debt-equity ratio of 0.45 and a tax rate of 35 percent. The cost of equity is 14.7 percent and the aftertax cost of debt is 5.1 percent. Presently, each division is considering a new project. Division Y's project provides a 12.3 percent rate of return and Division X's project provides an 11.64 percent return. Which projects, if any, should the company accept?

Accept X and reject Y

A firm has multiple divisions of similar nature, yet varying degrees of risk. Which one of the following would be the most appropriate, yet relatively easy, means of assigning discount rates to each of its proposed investments?

Assign every project a rate equal to the firm's WACC plus or minus a subjective adjustment

Orchard Farms has a pretax cost of debt of 7.68 percent and a cost of equity of 15.2 percent. The firm uses the subjective approach to determine project discount rates. Currently, the firm is considering a project to which it has assigned an adjustment factor of -0.5 percent. The firm's tax rate is 34 percent and its debt-equity ratio is 0.45. The project has an initial cost of $4.3 million and produces cash inflows of $1.27 million a year for 5 years. What is the net present value of the project?

$328,895

A firm wants to create a WACC of 10.4 percent. The firm's cost of equity is 14.5 percent and its pretax cost of debt is 8.5 percent. The tax rate is 34 percent. What does the debt-equity ratio need to be for the firm to achieve its target WACC?

0.86

Tim's Tools just issued a dividend of $1.80 per share on its common stock. The company is expected to maintain a constant 4 percent growth rate in its dividends indefinitely. If the stock sells for $31 a share, what is the company's cost of equity?

10.04 percent

Cromwell's Interiors is considering a project that is equally as risky as the firm's current operations. The firm has a cost of equity of 13.7 percent and a pretax cost of debt of 8.4 percent. The debt-equity ratio is .65 and the tax rate is 40 percent. What is the cost of capital for this project?

10.29 percent

Country Kitchen's cost of equity is 15.3 percent and its aftertax cost of debt is 6.9 percent. What is the firm's weighted average cost of capital if its debt-equity ratio is 0.58 and the tax rate is 30 percent?

12.21 percent

The 7.5 percent preferred stock of Rock Bottom Floors is selling for $60 a share. What is the firm's cost of preferred stock if the tax rate is 35 percent and the par value per share is $100?

12.50 percent

Western Electric has 23,000 shares of common stock outstanding at a price per share of $57 and a rate of return of 14.2 percent. The firm has 6,000 shares of 7 percent preferred stock outstanding at a price of $48 a share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $350,000 and currently sells for 102 percent of face. The yield to maturity on the debt is 8.49 percent. What is the firm's weighted average cost of capital if the tax rate is 34 percent?

12.69 percent

The Five and Dime Store has a cost of equity of 15.8 percent, a pretax cost of debt of 7.7 percent, and a tax rate of 35 percent. What is the firm's weighted average cost of capital if the debt-equity ratio is 0.40?

12.72 percent

Gulf Coast Tours currently has a weighted average cost of capital of 11.3 percent based on a combination of debt and equity financing. The firm has no preferred stock. The current debt-equity ratio is 0.58 and the aftertax cost of debt is 6.4 percent. The company just hired a new president who is considering eliminating all debt financing. All else constant, what will the firm's cost of capital be if the firm switches to an all-equity firm?

14.32 percent

Appalachian Mountain Goods has paid increasing dividends of $.0.12, $0.18, $0.20, and $0.25 a share over the past four years, respectively. The firm estimates that future increases in its dividends will be equal to the arithmetic average growth rate over these past four years. The stock is currently selling for $12.60 a share. The risk-free rate is 3.2 percent and the market risk premium is 9.1 percent. What is the cost of equity for this firm if its beta is 1.26?

22.96 percent

Kim's Bridal Shoppe has 15,000 shares of common stock outstanding at a price of $11 a share. It also has 2,000 shares of preferred stock outstanding at a price of $34 a share. There are 50 bonds outstanding that have a 7.5 percent semiannual coupon. The bonds mature in six years, have a face value of $1,000, and sell at 96 percent of par. What is the capital structure weight of the common stock?

58.72 percent

Traditional Bank has an issue of preferred stock with a $4.80 stated dividend that just sold for $80 a share. What is the bank's cost of preferred stock?

6.00 percent

Electronic Products has 35,000 bonds outstanding that are currently quoted at 102.3. The bonds mature in 11 years and carry a 9 percent annual coupon. What is the firm's aftertax cost of debt if the applicable tax rate is 30 percent?

6.07 percent

Titans, Inc. has 6 percent bonds outstanding that mature in 14 years. The bonds pay interest semiannually and have a face value of $1,000. Currently, the bonds are selling for $993 each. What is the firm's pretax cost of debt?

6.08 percent

Birds of a Feather has 10-year bonds outstanding that carry an annual coupon of 8 percent. The bonds mature in 7 years and are currently priced at 110 percent of face value. What is the firm's pretax cost of debt?

6.20 percent

Four years ago, the Morgan Co. issued 15-year, 7.0 percent semiannual coupon bonds at par. Today, the bonds are quoted at 101.6. What is this firm's pretax cost of debt?

6.79 percent

Judy's Boutique just paid an annual dividend of $1.65 on its common stock. The firm increases its dividend by 2.5 percent annually. What is the rate of return on this stock if the current stock price is $38.20 a share?

6.93 percent

Bermuda Cruises issues only common stock and coupon bonds. The firm has a debt-equity ratio of 0.65. The cost of equity is 18.3 percent and the pretax cost of debt is 9.9 percent. What is the capital structure weight of the firm's equity if the firm's tax rate is 34 percent?

60.61 percent

Lester's is a globally diverse company with multiple divisions and a cost of capital of 15.8 percent. Med, Inc. is a specialty firm in the medical equipment field with a cost of capital of 13.7 percent. With the aging of America, both firms recognize the opportunities that exist in the medical field and are considering expansion in this area. At present, there is an opportunity for multiple firms to be involved in a new medical devices project. Each project will require an initial investment of $8.4 million with annual returns of $2.2 million per year for seven years. Which firm or firms, if either, should become involved in the new projects?

Both Lester's and Med, Inc.

All else constant, which of the following will increase the aftertax cost of debt for a firm? I. Increase in the yield to maturity of the firm's outstanding debt II. Decrease in the yield to maturity of the firm's outstanding debt III. Increase in the firm's tax rate IV. Decrease in the firm's tax rate

I and IV only

All else constant, the weighted average cost of capital for a risky, levered firm will decrease if:

the firm's bonds start selling at a premium rather than at a discount.

All else constant, an increase in a firm's cost of debt:

will result in an increase in the firm's cost of capital.

Farmer's Supply, Inc. is considering opening a clothing store, which would be a new line of business for the firm. Management has decided to use the cost of capital of a similar clothing store as the discount rate that should be used to evaluate this proposed expansion. Which one of the following terms is used to describe the approach Farmer's Supply is taking to establish an appropriate discount rate for the project?

Pure play approach

Which one of the following is most apt to cause a wise manager to increase a project's cost of capital? Assume the firm is levered.

She learns the project is riskier than previously believed.

Kate is the CFO of a major firm and has the job of assigning discount rates to each project that is under consideration. Kate's method of doing this is to assign an incrementally higher rate as the risk level of the project increases over that of the current firm. Likewise, she assigns lower rates as the risk level declines. Which one of the following approaches is Kate using to assign the discount rates?

Subjective approach

The computation of which one of the following requires assigning every proposed investment to a particular risk class?

Subjective cost of capital

Which one of the following statements is correct related to the dividend growth model approach to computing the cost of equity?

The annual dividend used in the computation must be for year 1 if you are using today's stock price to compute the return.

A firm has a return on equity of 12.4 percent according to the dividend growth model and a return of 18.7 percent according to the capital asset pricing model. The market rate of return is 13.5 percent. What rate should the firm use as the cost of equity when computing the firm's weighted average cost of capital (WACC)?

The arithmetic average of 12.4 percent and 18.7 percent

Which one of the following statements is correct?

The cost of preferred stock is unaffected by the issuer's tax rate.

Black Stone Furnaces wants to build a new facility. The cost of capital for this investment is primarily dependent on which one of the following?

The nature of the investment

Which one of the following statements is correct concerning capital structure weights?

The repurchase of preferred stock will increase the weight of debt.

Kurt, who is a divisional manager, continually brags that his division's required return for its projects is 1 percent lower than the return required for any other division of the firm. Which one of the following most likely contributes the most to the lower rate requirement for Kurt's division?

Kurt's division is less risky than the other divisions.

Which one of the following is the primary determinant of an investment's cost of capital?

Level of risk

A firm that uses its weighted average cost of capital as the required return for all of its investments will:

increase the risk level of the firm over time.

The cost of preferred stock:

is equal to the stock's dividend yield.

Farm Equipment, Inc. announced this morning that its next annual dividend will be decreased to $1.80 a share and that all future dividends will be decreased by an additional 1.5 percent annually. What is the current value per share of this stock if the required return is 16.5 percent?

$10

Tennessee Valley Antiques would like to issue new equity shares if its cost of equity declines to 10.5 percent. The company pays a constant annual dividend of $1.80 per share. What does the market price of the stock need to be for the firm to issue the new shares?

$17.14

Alpha Industries is considering a project with an initial cost of $7.4 million. The project will produce cash inflows of $1.54 million a year for seven years. The firm uses the subjective approach to assign discount rates to projects. For this project, the subjective adjustment is +1.5 percent. The firm has a pretax cost of debt of 8.6 percent and a cost of equity of 13.7 percent. The debt-equity ratio is 0.0.65 and the tax rate is 35 percent. What is the net present value of the project?

-$372,951

Design Interiors has a cost of equity of 18.6 percent and a pretax cost of debt of 9.7 percent. The firm's target weighted average cost of capital is 12 percent and its tax rate is 35 percent. What is the firm's target debt-equity ratio?

1.16

Healthy Snacks, Inc. has a target capital structure of 55 percent common stock, 5 percent preferred stock, and 40 percent debt. Its cost of equity is 14.3 percent, the cost of preferred stock is 8.9 percent, and the pretax cost of debt is 8.1 percent. What is the company's WACC if the applicable tax rate is 35 percent?

10.43 percent

Marine Expeditors has three divisions. Division A is the core of the business and represents 80 percent of the firm's operations. Division B is involved only with contractual short-term projects and therefore has about 8 percent less risk than Division A. Division C develops and markets new products and is about 12 percent riskier than Division A and about equal in size to Division B. The manager of Division A has suggested that the operations of his division be increased by 10 percent next year. The proposed project should probably be assigned a required return that is equal to _____ percent of the firm's weighted average cost of capital.

100

Given the following information for Electric Transport, find the WACC. Assume the company's tax rate is 34 percent. Debt: 7,500, 8.4 percent coupon bonds outstanding. $1,000 par value, 22 years to maturity, selling for 103 percent of par, the bonds make semiannual payments. Common stock: 195,000 shares outstanding, selling for $78 per share, beta is 1.21. Preferred stock: 11,000 shares of 6.35 percent preferred stock outstanding, currently selling for $76 per share. Market: 8 percent market risk premium and 5.1 percent risk-free rate.

11.49 percent

Precision Cuts has a target debt-equity ratio of 0.55. Its cost of equity is 15.4 percent, and its pretax cost of debt is 7.8 percent. If the tax rate is 32 percent, what is the company's WACC?

11.82 percent

Musical Charts just paid an annual dividend of $2.45 per share. This dividend is expected to increase by 3.3 percent annually. Currently, the firm has a beta of 1.09 and a stock price of $36 a share. The risk-free rate is 4.2 percent and the market rate of return is 12.6 percent. What is the cost of equity capital for this firm?

11.84 percent

Lawler's is considering a new project. The company has a debt-equity ratio of 0.72. The company's cost of equity is 15.1 percent, and the aftertax cost of debt is 7.2 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +3 percent. What is the WACC it should use for the project?

14.79 percent

The market rate of return is 14.8 percent and the risk-free rate is 4.45 percent. Galaxy Co. has 54 percent more systematic risk than the overall market and has a dividend growth rate of 5.5 percent. The firm's stock is currently selling for $39 a share and has a dividend yield of 3.6 percent. What is the firm's cost of equity?

14.84 percent

The preferred stock of Dolphin Pools pays an annual dividend of $6.25 a share and sells for $42 a share. The tax rate is 35 percent. What is the firm's cost of preferred stock?

14.88 percent

The common stock of Wiley and Sons has a beta that is 25 percent larger than the overall market beta. Currently, the market risk premium is 9.5 percent while the U.S. Treasury bill is yielding 4.7 percent. What is the cost of equity for this firm?

16.58 percent

The 7.5 percent preferred stock of Home Town Brewers is selling for $45 a share. What is the firm's cost of preferred stock if the tax rate is 35 percent and the par value per share is $100?

16.67 percent

Piedmont Hotels is an all-equity firm with 60,000 shares of stock outstanding. The stock has a beta of 1.27 and a standard deviation of 13.8 percent. The market risk premium is 9.1 percent and the risk-free rate of return is 4.5 percent. The company is considering a project that it considers riskier than its current operations so it wants to apply an adjustment of 1 percent to the project's discount rate. What should the firm set as the required rate of return for the project?

17.06 percent

The common stock of Contemporary Interiors has a beta of 1.65 and a standard deviation of 27.4 percent. The market rate of return is 13.2 percent and the risk-free rate is 4.8 percent. What is the cost of equity for this firm?

18.66 percent

Santa Claus Enterprises has 174,000 shares of common stock outstanding at a current price of $46 a share. The firm also has two bond issues outstanding. The first bond issue has a total face value of $250,000, pays 7.7 percent interest annually, and currently sells for 102.5 percent of face value. The second bond issue consists of 5,000 bonds that are selling for $993 each. These bonds pay 6.5 percent interest annually and mature in eight years. The tax rate is 34 percent. What is the capital structure weight of the firm's debt?

39.48 percent

Great Lakes Packing has two bond issues outstanding. The first issue has a coupon rate of 9 percent, matures in 3 years, has a total face value of $6 million, and is quoted at 108 percent of face value. The second issue has a 7.5 percent coupon, matures in 16 years, has a total face value of $18 million, and is quoted at 97 percent of face value. Both bonds pay interest semiannually. What is the firm's weighted average aftertax cost of debt if the tax rate is 35 percent?

4.78 percent

The Color Box uses a combination of common stock, preferred stock, and debt financing. The company wants preferred stock to represent 8 percent of the total financing. It also wants to structure the firm in a manner that will produce a weighted average cost of capital of 10.25 percent. The aftertax cost of debt is 5.1 percent, the cost of preferred is 9.3 percent, and the cost of common stock is 15.6 percent. What percentage of the firm's capital funding should be debt financing?

46.12 percent

The Green Balloon just paid its first annual dividend of $0.12 a share. The firm plans to increase the dividend by 3.5 percent per year indefinitely. What is the firm's cost of equity if the current stock price is $6.50 a share?

5.41 percent

Rockingham Motors issued a 20-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 96.8 percent of its face value. The company's tax rate is 35 percent. What is the aftertax cost of debt?

5.43 percent

USA Manufacturing issued 30-year, 8.5 percent semiannual bonds 6 years ago. The bonds currently sell at 101 percent of face value. What is the firm's aftertax cost of debt if the tax rate is 30 percent?

5.88 percent

Smith and Weston has 55,000 shares of common stock outstanding at a price of $31 a share. It also has 3,000 shares of preferred stock outstanding at a price of $62 a share. The firm has 8 percent, 12-year bonds outstanding with a total face value of $400,000. The bonds are currently quoted at 101.2 percent of face and pay interest semiannually. What is the capital structure weight of the firm's preferred stock if the tax rate is 35 percent?

8.10 percent

You are given the following information concerning Around Town Tours: Debt: 8,500, 7.1 percent coupon bonds outstanding, with 14 years to maturity and a quoted price of 102.6. These bonds pay interest semiannually. Common stock: 265,000 shares of common stock selling for $76 per share. The stock has a beta of 0.92 and will pay a dividend of $2.48 next year. The dividend is expected to grow by 4 percent per year indefinitely. Preferred stock: 7,500 shares of 6 percent preferred stock selling at $88 per share. Market: A 13.2 percent expected return, a 4.5 percent risk-free rate, and a 34 percent tax rate. Calculate the WACC for this firm.

8.22 percent

Madison Square Stores has a $20 million bond issue outstanding that currently has a market value of $18.6 million. The bonds mature in 6.5 years and pay semiannual interest payments of $35 each. What is the firm's pretax cost of debt?

8.42 percent

International Exchange has three divisions: A, B, and C. Division A has the least risk and Division C has the most risk. The firm has an aftertax cost of debt of 6.1 percent and a cost of equity of 14.3 percent. The firm is financed with 35 percent debt and 65 percent equity. Division A's projects are assigned a discount rate that is 3 percent less than the firm's weighted average cost of capital. What is the discount rate applicable to Division A?

8.44 percent

The Cracker Barrel has a beta of 0.98, a dividend growth rate of 3.2 percent, a stock price of $33 a share, and an expected annual dividend of $1.06 per share next year. The market rate of return is 11.2 percent and the risk-free rate is 3.7 percent. What is the firm's cost of equity?

8.73 percent

Which of the following features are advantages of the dividend growth model? I. Easy to understand II. Model simplicity III. Constant dividend growth rate IV. Model's applicability to all common stocks

I and II only

Casper's is analyzing a proposed expansion project that is much riskier than the firm's current operations. Thus, the project will be assigned a discount rate equal to the firm's cost of capital plus 3 percent. The proposed project has an initial cost of $17.2 million that will be depreciated on a straight-line basis over 20 years. The project also requires additional inventory of $687,000 over the project's life. Management estimates the facility will generate cash inflows of $2.78 million a year over its 20-year life. After 20 years, the company plans to sell the facility for an estimated $1.3 million. The company has 60,000 shares of common stock outstanding at a market price of $49 a share. This stock just paid an annual dividend of $1.84 a share. The dividend is expected to increase by 3.5 percent annually. The firm also has 10,000 shares of 12 percent preferred stock with a market value of $98 a share. The preferred stock has a par value of $100. The company has a 9 percent, semiannual coupon bond issue outstanding with a total face value of $1.1 million. The bonds are currently priced at 102 percent of face value and mature in 16 years. The tax rate is 33 percent. Should the firm pursue the expansion project at this point in time? Why or why not?

Accept; the NPV is $4.507 million.

Boone Brothers remodels homes and replaces windows. Ace Builders constructs new homes. If Boone Brothers considers expanding into new home construction, it should evaluate the expansion project using which one of the following as the required return for the project?

Ace Builders' cost of capital

Beverly's is a retail chain selling the latest fashions through its outlets located in various neighborhood malls. Clothing Galore is a wholesaler that buys from textile mills and sells to retail outlets. Beverly's has a cost of capital of 13.6 percent, while Clothing Galore's cost of capital is 17.8 percent. Both firms are considering opening a retail outlet in a gigantic new mall. Both proposals are quite similar in design and have basically the following financial features: an initial cash outlay of $2.7 million, a projected five-year life with no salvage value, and cash inflows of $845,000 a year for the life of the project. Which firm or firms, if either, should open a retail outlet in the new mall?

Both Beverly's and Clothing Galore

Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC?

Cost of equity

The cost of capital for a project depends primarily on which one of the following?

How the project uses its funds

You need to use the pure play approach to assign a cost of capital to a proposed investment. Which one of the following characteristics should you most concentrate on as you search for an appropriate pure play firm?

Firm operations

The aftertax cost of which of the following is affected by a change in a firm's tax rate? I. Preferred stock II. Debt III. Equity IV. Capital

II and IV only

Which of the following are weaknesses of the dividend growth model? I. Market risk premium fluctuations II. Lack of dividends for some firms III. Reliance on historical beta IV. Sensitivity of model to dividend growth rate

II and IV only

Which of the following will increase the cost of equity for a firm with a beta of 1.1? I. Decrease in the security's beta II. Decrease in the market risk premium III. Decrease in the risk-free rate IV. Increase in the risk-free rate

III only

Which one of the following will decrease the aftertax cost of debt for a firm?

Increase in tax rates

Which one of the following will increase the cost of equity, all else held constant?

Increase in the dividend growth rate

Which one of the following will affect the capital structure weights used to compute a firm's weighted average cost of capital?

Increase in the market value of the firm's common stock

Trendsetters has a cost of equity of 18.1 percent. The market risk premium is 10.2 percent and the risk-free rate is 4.4 percent. The company is acquiring a competitor, which will increase the company's beta to 1.6. What effect, if any, will the acquisition have on the firm's cost of equity capital?

Increase of 2.62 percent Increase of 2.62 percent

In an efficient market, the cost of equity for a risky firm does which one of the following according to the security market line?

Increases in direct relation to the stock's systematic risk

A firm has a cost of equity of 13 percent, a cost of preferred of 11 percent, and an aftertax cost of debt of 6 percent. Given this, which one of the following will increase the firm's weighted average cost of capital?

Increasing the firm's beta

Bob's is a retail chain of specialty hardware stores. The firm has 21,000 shares of stock outstanding that are currently valued at $68 a share and provide a 13.2 percent rate of return. The firm also has 500 bonds outstanding that have a face value of $1,000, a market price of $1,068, and a 7 percent coupon. These bonds mature in 6 years and pay interest semiannually. The tax rate is 35 percent. The firm is considering expanding by building a new superstore. The superstore will require an initial investment of $12.3 million and is expected to produce cash inflows of $1.1 million annually over its 10-year life. The risks associated with the superstore are comparable to the risks of the firm's current operations. The initial investment will be depreciated on a straight line basis over the life of the project. At the end of the 10 years, the firm expects to sell the superstore for $6.7 million. Should the firm accept or reject the superstore project and why?

Reject; the NPV -$3.27 million.

Kelly's uses the firm's WACC as the required return for some of its projects. For other projects, the firms uses a rate equal to WACC plus 1 percent, while another set of projects is assigned rates equal to WACC minus some amount. Which one of the following factors should be the key factor the firm uses to determine the amount of the adjustment it will make when assigning the project a discount rate?

Risk level of project

Ted is trying to decide what cost of capital he should assign to a project. Which one of the following should be his primary consideration in this decision?

Risk level of the project

Which one of the following represents the rate of return a firm must earn on its assets if it is to maintain the current value of its securities?

Weighted average cost of capital

Which one of the following is the pretax cost of debt?

Weighted average yield to maturity on the firm's outstanding debt

Old Town Industries has three divisions. Division X has been in existence the longest and has the most stable sales. Division Y has been in existence for five years and is slightly less risky than the overall firm. Division Z is the research and development side of the business. When allocating funds, the firm should probably:

assign the highest cost of capital to Division Z because it is most likely the riskiest of the three divisions.

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:

automatically gives preferential treatment in the allocation of funds to its riskiest division.

When using the pure play approach for a proposed investment, a firm is primarily seeking a rate of return that:

best matches the risk level of the proposed investment.

Lester lent money to The Corner Store by purchasing bonds issued by the store. The rate of return that he and the other lenders require is referred to as the:

cost of debt.

The weighted average cost of capital is defined as the weighted average of a firm's:

cost of equity and its aftertax cost of debt.