Chapter 14 (Finance)

The WACC would most likely decrease if the firm replaced its preferred stock with debt.

Assume a firm employs debt in its capital structure. Which of the following statements is accurate?

rate of return a company must earn on its existing assets to maintain the current value of its stock.

Assume a firm has a debt-equity ratio of .62. The firm's weighted average cost of capital is the:

increase the average risk level of the company over time.

Assume a firm utilizes its WACC as the discount rate for every capital project it implements. Accordingly, the firm will tend to:

A decrease in the firm's beta

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firm's cost of equity?

The cost of equity is unaffected by a change in the company's tax rate.

The capital structure of Pendekanti Products is 58 percent common stock, 2 percent preferred stock, and 40 percent debt. The firm maintains a dividend payout ratio of 24 percent, has a beta of 1.08, and has an income tax rate of 21 percent. Given this information, which one of the following statements is accurate?

rate of return on a perpetuity.

The cost of preferred stock is equivalent to the:

use of the funds raised.

When determining a firm's cost of capital, the most important determinant is the:

company's overall cost of capital may increase or decrease over time.

When evaluating capital project proposals, assume a firm assigns unique discount rates based on the risk level of each project. Accordingly the:

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

When using the subjective approach to project analysis, a firm:

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

Which of the following statements regarding a firm's pretax cost of debt is accurate?

Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.

With respect to capital project analysis, which of the following statements is accurate?