Ch. 11 Finance

10. This is an estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division. A. Average WACC B. Divisional WACC C. Proxy WACC D. Pure-play WACC

B

11. Which of these statements is true regarding divisional WACC? A. Using a divisional WACC vs a WACC for the firm's current operations will result in quite a few incorrect decisions. B. Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present more risk than the firm's average beta. C. Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present less risk than the firm's average beta. D. Using a firmwide WACC to evaluate new projects would have no impact on projects that present less risk than the firm's average beta.

B

13. Which statement makes this a false statement? When a firm pays commissions to underwriting firms that float the issuance of new stock, A. the component cost will need to be integrated to figure project WACCs. B. the component cost will need to be integrated only for the firm's WACC. C. the firm can increase the project's WACC to incorporate the flotation costs' impact. D. the firm can leave the WACC alone and adjust the project's initial investment upwards.

A

17. These are fees paid by firms to investment bankers for issuing new securities. A. flotation costs B. interest expense C. seller financing charges D. user fees

A

3. Which of the following is a true statement? A. To estimate the before-tax cost of debt, we need to solve for the Yield to Maturity (YTM) on the firm's existing debt. B. To estimate the before-tax cost of debt, we need to solve for the Yield to Call (YTC) on the firm's existing debt. C. To estimate the before-tax cost of debt, we use the coupon rate on the firm's existing debt. D. To estimate the before-tax cost of debt, we use the average rate on the firm's existing debt.

A

6. Which of the following statements is true? A. If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital. B. If the new project is riskier than the firm's existing projects, then it should be charged a lower cost of capital. C. If the new project is riskier than the firm's existing projects, then it should be charged the firm's cost of capital. D. The new project's risk is not a factor in determining its cost of capital.

A

15. Which of these makes this a true statement? The WACC formula A. is not impacted by taxes. B. uses the after-tax costs of capital to compute the firm's weighted average cost of debt financing. C. uses the pre-tax costs of capital to compute the firm's weighted average cost of debt financing. D. focuses on operating costs only to keep them separate from financing costs.

B

16. Which of these makes this a true statement? When determining the appropriate weights used in calculating a WACC, it should reflect A. the relative sizes of the total book capitalizations for each kind of security that the firm issues. B. the relative sizes of the total market capitalizations for each kind of security that the firm issues. C. only the market after-tax cost of debt. D. only the market after-tax cost of equity.

B

5. Which of these statements is true regarding calculating weights for WACC? A. If we are calculating WACC for the firm, then equity, preferred stock and debt would be the entire book value of each source of capital. B. If we are calculating WACC for the firm, then equity, preferred stock and debt would be the entire market value of each source of capital. C. If we are calculating WACC for a project, then equity, preferred stock and debt would be the entire book value of each source of capital. D. If we are calculating WACC for a project, then equity, preferred stock and debt would be the entire market value of each source of capital.

B

8. An average of which of the following will give a fairly accurate estimate of what a project's beta will be? A. flotation beta B. proxy beta C. pure-play proxies D. weighted average beta

B

1. When calculating the weighted average cost of capital, weights are based on A. book values. B. book weights. C. market values. D. market betas.

C

12. An objective approach to calculating divisional WACCs would be done by A. simply considering the project's risk relative to the firm's lines of business and adjusting upward or downward to account for subjective opinions of project risk. B. computing the average beta for the firm, the firm's CAPM formula, and the firm's WACC. C. computing the average beta per division, using these figures for each division in the CAPM formula, and then constructing divisional WACCs. D. simply averaging out all the WACCs for all the firm's projects.

C

14. This is a principle of capital budgeting which states that the calculations of cash flows should remain independent of financing. A. generally accepted accounting principle B. financing principle C. separation principle D. WACC principle

C

2. Which of these completes this statement to make it true? The constant growth model is A. always going to have assumptions that will hold true. B. able to be adjusted for stocks that don't expect constant growth without sizeable errors. C. only going to be appropriate for the limited number of stocks that just happen to expect constant growth. D. only going to be appropriate for the limited number of stocks that just happen to expect nonconstant growth.

C

4. Which of the following is a true statement regarding the appropriate tax rate to be used in the WACC? A. One would use the marginal tax rate that the firm paid the prior year. B. One would use the average tax rate that the firm paid the prior year. C. One would use the weighted average of the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction. D. One would use the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction.

C

7. Which of the following makes this a true statement? If the new project does significantly increase the firm's overall risk, A. the increased risk will be borne equally amongst the bond holders, preferred stockholders, and common stockholders. B. the increased risk will be borne disproportionately by bond holders. C. the increased risk will be borne disproportionately by preferred stockholders. D. the increased risk will be borne disproportionately by common stockholders.

D

9. Which of the following makes this a true statement? Ideally, when searching for a beta for a new line of business A. one could find other firms engaged in the proposed new line of business and use their betas as proxies to estimate the project's risk. B. one would like to find at least three or four pure-play proxies. C. two, or even one, proxies might represent a suitable sample if their line of business resembles the proposed new project closely enough. D. All the answers make this a true statement.

D