finance chapter 14

the WACC is the minimum return a company needs to earn to satisfy

- Its bondholders- Its stockholders

these are true

- book values are often similar to market values for debt - ideally, we should use market values in the WACC

The SML approach requires estimates of

- market risk premium - beta coefficient

The growth rate of dividends can be found using:

- security analysts' forecasts - historical dividend growth rates

which of the following are components used in the construction of the WACC

-cost of debt -cost of preferred stock -cost of common stock

To estimate a firm's equity cost of capital using the CAPM, we need to know the ______

-risk free rate -market premium -beta coefficient

If a preferred stock pays a dividend of $2 per year and is selling for $20, its yield is:

10%

according to the CAPM, what is the expected return on a stock if its beta is equal to zero?

The risk-free rate

Which one of the following is true? 1. Under US tax law, all company interest payments are taxable to the company 2. Under international tax law, all company interest payments are taxable to the company 3. Under US tax law, a corporation's interest payments are tax-deductible 4. Under international tax law, all company interest payments are tax-deductible

Under US tax law, a corporation's interest payments are tax-deductible

given the definitions above, the weighted average cost of capital formula can be written as

[S/(S+B)] x Rs + [B/(S+B)] x Rs x (1-Tc)

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 firms projects equals the cost of capital for the firm as a whole when ___

all projects have the same risk as the current firm

to apply the dividend growth model to a particular stock, you need to assume that the firms ___ will grow at a constant rate

dividend

The return an investor in a security receives is ______ _____ the cost of the security to the company that issued it.

equal to

Preferred stock _____.

pays dividends in perpetuity pays a constant dividend

A project should only be accepted if its return is above what is ____________.

required by investors

the rate used to discount project cash flows is known as the

required return discount rate cost of capital

which of the following methods for calculating the cost of equity ignores risk?

the dividend growth model

finding a firms overall cost of equity is difficult because

there is no way of directly observing the return that the firms equity investors require on their investment

if a firm uses its overall cost of capital to discount cash flows from higher risk projects, it will accept ____ projects.

too many high risk

A firm's cost of debt can be

• Obtained by talking to investment bankers • Obtained by checking yields on publicly traded bonds • Estimated easier than its cost of equity.

A firm's capital structure consists of 40 percent debt and 60 percent equity. The after-tax yield on debt is 2.5 percent and the cost of equity is 15 percent. The project is just about as risky as the overall firm. What discount rate should be used to estimate the project's net present value?10%((.60/.40+.60)x.15)+((.40/.40+.60)x.025)make sure to break down into smaller steps, not just the the whole equation in one step

10% ((.60/.40+.60)x.15)+((.40/.40+.60)x.025) make sure to break down into smaller steps, not just the the whole equation in one step

if an analysts forecast for a firms earnings growth is 7%, and its dividend yield is 3%, its cost of equity will be

10% 3%+7%=10%

a company has a borrowing rate of 15 percent and a tax rate of 21 percent. what is its aftertax cost of debt?

11.85% (15%*(1-0.21)

in an all-equity firm discounts a projects cash flows with the firms overall weighted average cost of capital even though the projects beta is less than the firms overall beta, it is possible that the project might be

rejected, when it should be accepted

If the market value of debt is $45 million and the market value of equity is $105 million, the total firm value is ________ million.

150