Finance 314 Chapter 14

GE has two separate divisions. each division is in a separate line of business. Division A is the largest division and represents 70 percent of the firm's overall sales. Divides A is also the riskier of the two divisions. Division B is the smaller and least risky if the two. When management is deciding which of the various divisional projects should be accepted, the manager should:

Assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values

TechX borrows money at a rate of 18.5 percent. This interest rate is referred to as the:

Cost of Debt

The aftertax cost of debt

Has a greater effect on a firm's cost of capital when the debt-equity ration increases

The dividend Growth Model

Is only reliable as the estimate rate of growth

When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has similar line of business as the project, the manager is utilizing the ___ approach.

Pure Play

a group investors got together and decided to purchase all of the outstanding shares of common stock of KTC, What is the return that these individuals require on the investment called?

Required Return

the cost of preferred stock is computed the same as the:

Return on a perpetuity

the flotation cost for a firm is computed as:

The weighted average of the flotation costs associated with each form of financing.

The average of firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is called the:

Weighted average cost capital

The subjective approach to project analysis:

assigns discount rate to projects ase on the discretion of the senior managers of a firm.

When a firm has floatation cost equal 7 percent of the funding need, project analysts should:

increase the initial project cost by dividing that cost by (1-0.07)

the pre-tax cost of debt:

is based on the current yield to maturity of the firm's outstanding bonds.

The cost of Preferred Stock:

is equal to the dividend yield

the weight average cost of capital

is the return require on the total assets of the firm