Finance Final pt. 2

When using the bond yield plus risk premium approach to estimating the cost of equity, the equity premium risk is usually:

3-5%

The cost of preferred stock is computed the same as:

a perpetuity

___________ is the process of deciding which long-term investments or projects a firm will acquire using the long-term funds a firm has available.

capital budgeting

The proportions of a market value of the firm's assets financed via debt, common stock, and preferred stock are called the firm's:

capital structure weights

The return that shareholders for common stock require on their investment in the firm is the:

cost of equity

The relevant cash flows for capital budgeting analysis are:

incremental cash flows

According to the internal rate of return method, a firm should accept the project if the:

internal rate of return exceeds the cost of capital

The pre-tax cost of a firm:

is equal to the maturity on the outstanding bonds of the firm

The constant dividend growth model:

is highly applicable only to firms that pay a constant dividend

When the net present value is negative, the internal rate of return is _____________ the cost of capital

less than

The ultimate goal of capital budgeting analysis is to select projects that:

maximize shareholder wealth

The sale of an ordinary asset for its book value results in:

no tax benefit

The __________________ method to analyze cash flows associated with a project does not consider the time value of money.

payback period

When evaluating a project, a firm's managers should select only those projects whose cash flows:

produce higher returns than the firm's average cost of capital.

The book value of an asset is equal to:

purchase price minus the accumulated depreciation

If a firm applies its overall cost of capital to all of its proposed projects, then the divisions within the firm will tend to:

receive more funding if they represent the riskiest operations of the firm

_____________ risks affects all stocks to a greater or lesser extent and is due to large macroeconomic shocks. This type of risk _________ be eliminated through diversification.

systematic; cannot

The primary problem with the NPV technique of capital budgeting is:

that many people without a background in financial theory may not understand it

According to the net present value technique, a project is considered acceptable if:

the difference between all discounted cash inflows and outflows exceeds zero

A firm's cost of debt often differs from the yield reported on its bonds because:

the interest paid on corporate bonds is tax-deductible

The least desirable capital budgeting technique from a theoretical standpoint is:

the payback method

The discount rate assigned to an individual project should be based on:

the risk level of the project itself

______________ risk __________ be eliminated through greater diversification and is due to firm-specific or industry-wide factors such as strikes or resource price change.

unsystematic; can

The weighed average of the firm's costs of equity, preferred stock, and after-tax debt is the:

weighted average cost of capital (WACC)

The internal rate of return may be defined as the:

discount rate at which a project's NPV equals zero

An outlay for installation costs is not considered part of the depreciable basis of the asset to be purchased. (TRUE/FALSE)

false