FIN 300 - Chapter 12 Quiz

The most appropriate weights to use in the WACC are the ______________ weights.

market value

For a firm with outstanding debt, the cost of debt will be the ______________ on that debt.

yield to maturity

True or False: Conglomerates are companies that specialize only in projects similar to the project your firm is considering.

False

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 projects beta is less than the firm's overall beta, it is possible that the project might be:

rejected, when it should be accepted

The formula for calculating the cost of equity capital that is based on the dividend discount model is:

Re = D1 / P0 + g

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) x Rp

Which of the following are components used in the construction of the WACC?

Cost of Preferred Stock Cost of Common Stock Cost of Debt

True or False: Finding the cost of equity is fairly straightforward

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

Which of the following is true about a firm's cost of debt?

It is easier to estimate than the cost of equity Yields can be calculated from observable data

What will happen over time if a firm uses its overall WACC to evaluate projects, regardless of each project's risk level?

It will accept projects that it should have rejected The firm overall will become riskier It will reject projects that it should have accepted

To estimate a firm's equity cost of capital using the CAPM, we need to know the __________________, _____________________, ___________________ .

Market Risk Premium Risk-Free Rate Stock's Beta

What is the required return on stock (Re), according to the constant dividend growth model, if the growth rate (g) is zero?

Re = D1 / P0

The formula of the SML is:

Re = Rf + Beta x (Rm - Rf)

The rate used to discount project cash flows is known as the ___________________, ____________________, ___________________.

Required Return Discount Rate Cost of Capital

What is the equation for finding the cost of preferred stock?

Rp = D/P0

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

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

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] x Re + [D/V] x Rd x (1-Tc)

If a firm has multiple projects, each project should be discounted using ____________________.

a discount rate commensurate with the project's risk

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

Which of the following is tax-deductible to the firm?

coupon interested paid on bonds

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

Components of the WACC include funds that come from __________________.

investors

Finding a firm's overall cost of equity is difficult because:

it cannot be observed directly

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

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