Corporate Finance Chapter 1213
Including preferred stock in the WACC formula adds which term if P is the market value of preferred stock and RP is the cost of preferred?
(P/V) × RP
Which of the following are components used in the construction of the WACC?
Cost of debt Cost of preferred stock Cost of common stock
Which of the following is tax-deductible to the firm?
Coupon interest paid on bonds
True or false: According to the CAPM, if the market risk premium is zero, then the expected return on a stock is equal to the required return.
False
True or false: Conglomerates are companies that specialize only in projects similar to the project your firm is considering.
False
True or false: Finding the cost of equity is fairly straightforward.
False
True or false: For publicly traded companies, the component of the dividend yield that must be estimated is the dividend.
False
True or false: Projects should always be discounted at the firm's overall cost of capital.
False
True or false: The discount rate is also known as the expected return.
False
True or false: The primary disadvantage of the dividend growth model approach is its simplicity.
False
What is the required return on a stock (RE), according to the constant dividend growth model, if the growth rate (g) is zero?
RE = D1/P0
The formula for calculating the cost of equity capital that is based on the dividend discount model is:
RE = D1/P0 + g
The formula of the SML is:
RE = Rf + Beta x (RM- Rf)
What is the equation for finding the cost of preferred stock?
RP=D/P0
True or false: RP=D/P0
True
True or false: The return an investor in a security receives is equal to the cost of the security to the company that issued it.
True
Given V = E + D, if we divide both V and D by______we can calculate the capital structure weights.
V
What is the appropriate discount rate to use only if the proposed investment is a replica of the firm's existing operating activities?
WACC
Which of the following is true about a firm's cost of debt?
Yields can be calculated from observable data It is easier to estimate than the cost of equity.
If D is the market value of a firm's debt, E the market value of that same firm's equity, V the total value of the firm (E+D), RD the yield on the firm's debt, TC is the corporate tax rate, and RE the cost of equity, the weighted average cost of capital is:
[E/V] × RE + [D/V] × RD ×(1 - T c)
If a firm has multiple projects, each project should be discounted using ___.
a discount rate commensurate with the project's risk
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 that of the firm overall
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
Dividends paid to common stockholders ______ be deducted from the payer's taxable income for tax purposes.
cannot
The rate used to discount project cash flows is known as the ___.
discount rate cost of capital required return
The dividend growth model is applicable to companies that pay
dividends
The return an investor in a security receives is ______ _____ the cost of the security to the company that issued it.
equal to
Finding a firm's overall cost of equity is difficult because:
it cannot be observed directly
To estimate a firm's equity cost of capital using the CAPM, we need to know the
market risk premium stock's beta risk-free rate
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
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 of a firm reflects the-----and the target capital structure of the firm's existing assets as a whole.
risk
It is difficult to establish discount rate for individual projects, so firm's often adopt an approach that involves making ______ adjustments to the overall WACC.
subjective
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
To estimate the dividend yield of a particular stock, we need:
the current stock price forecasts of the dividend growth rate, g the last dividend paid, D0
According to the CAPM, what is the expected return on a stock if its beta is equal to zero?
the risk free rate
If a firm uses its overall cost of capital to discount cash flows from projects in higher risk divisions, it will accept ______ projects.
too many
For a firm with outstanding debt, the cost of debt will be the ________ on that debt.
yield to maturity
For a firm with outstanding debt, the cost of debt will be the ________ on that debt..
yield to maturity
