MGMT 310 CH 14

Which one of these will increase a company's aftertax cost of debt? A decrease in the company's debt-equity ratio A decrease in the company's tax rate An increase in the credit rating of the company's bonds An increase in the company's beta A decrease in the market rate of interest

A decrease in the company's tax rate

A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith Inc. What is the return that these individuals require on this investment called? Dividend yield Cost of equity Capital gains yield Cost of capital Income return

Cost of equity

The capital structure weights used in computing a company's weighted average cost of capital: are based on the book values of debt and equity. are based on the market values of the outstanding securities. depend upon the financing obtained to fund each specific project. remain constant over time unless new securities are issued or outstanding securities are redeemed. are restricted to debt and common stock.

are based on the market values of the outstanding securities.

The subjective approach to project analysis: is used only when a firm has an all-equity capital structure. uses the WACC of Firm X as the basis for the discount rate for a project under consideration by Firm Y. assigns discount rates to projects based on the discretion of the senior managers of a firm. allows managers to randomly adjust the discount rate assigned to a project once the project's standard deviation has been determined. applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt

assigns discount rates to projects based on the discretion of the senior managers of a firm.

A company's current cost of capital is based on: only the return required by the company's current shareholders. the current market rate of return on equity shares. the weighted costs of all future funding sources. both the returns currently required by its debtholders and stockholders. the company's original debt-equity ratio.

both the returns currently required by its debtholders and stockholders.

The cost of capital for a new project: is determined by the overall risk level of the firm. is dependent upon the source of the funds obtained to fund that project. is dependent upon the firm's overall capital structure. should be applied as the discount rate for all other projects considered by the firm. depends upon how the funds raised for that project are going to be spent.

depends upon how the funds raised for that project are going to be spent.

A company's overall cost of equity is: generally less than its WACC given a debt-equity ratio of .5. unaffected by changes in the market risk premium. directly related to the risk level of the firm. generally less than the firm's aftertax cost of debt. inversely related to changes in the level of inflation.

directly related to the risk level of the firm.

A company's pretax cost of debt: is based on the current yield to maturity of the company's outstanding bonds. is equal to the coupon rate on the latest bonds issued by the company. is equivalent to the average current yield on all of a company's outstanding bonds. is based on the original yield to maturity on the latest bonds issued by a company. has to be estimated as it cannot be directly observed in the market.

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

A company's weighted average cost of capital: is equivalent to the aftertax cost of the outstanding liabilities. should be used as the required return when analyzing any new project. is the return investors require on the total assets of the firm. remains constant when the debt-equity ratio changes. is unaffected by changes in corporate tax rates.

is the return investors require on the total assets of the firm.

When a manager develops a cost of capital for a specific project based on the cost of capital for another firm that has a similar line of business as the project, the manager is utilizing the _____ approach. subjective risk pure play divisional cost of capital capital adjustment security market line

pure play

The cost of preferred stock is computed the same as the: pretax cost of debt. rate of return on an annuity. aftertax cost of debt. rate of return on a perpetuity. cost of an irregular growth common stock.

rate of return on a perpetuity.

The discount rate assigned to an individual project should be based on: the company's overall weighted average cost of capital. the actual sources of funding used for the project. an average of the company's overall cost of capital for the past five years. the current risk level of the overall firm. the risks associated with the use of the funds required by the project.

the risks associated with the use of the funds required by the project.