hw 6

which of the following actions will decrease the firm's cost of equity?

A decrease in the firm's beta

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

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

According to ________, the value of a company is unrelated to its capital structure.

M&M Proposition I, no tax

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

The tax effect of the interest expense must be removed.

M&M Proposition II, without taxes, is the proposition that:

a company's cost of equity is a linear function with a slope equal to (RA − RD).

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

assumes the reward-to-risk ratio is constant.

When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to:

decrease

With firm commitment underwriting, the issuing firm:

knows upfront the amount of money it will receive from the stock offering.

According to the capital asset pricing model (CAPM), the amount of reward an investor receives for bearing the risk of an individual security depends upon the:

market risk premium and the amount of systematic risk inherent in the security.

If a security is fairly priced, its ________ divided by its beta will equal the slope of the security market line.

risk premium

Cheung Software has decided to go public and has hired an investment firm to handle the offering. The investment firm's role is to be a(n):

underwriter

Which of the following are assumptions of the capital asset pricing model (CAPM)? I. A risk

free asset has no systematic risk. II. Beta is a reliable estimate of total risk. III. The reward-to-risk ratio is constant. IV. The market rate of return can be approximated. - I, III, and IV only

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

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

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

decrease in the company's tax rate.