FIN 101 - CH 12

WACC is used to discount _ _ a) cash flows b) political unrest c) common stock dividends d) news

a) cash flows

SmartKids, a textbook publisher, is considering investing in a software company that collects and stores data. What beta should SmartKids use to assess the risk of the project? a) The beta for the textbook industry as a whole. b) The beta for SmartKids. c) The beta for software companies that collect and store data. d) The beta for software companies as a whole.

c) The beta for software companies that collect and store data.

A firm's capital structure consists of 30 percent debt and 70 percent equity. Its bonds yield 10 percent, pretax, its cost of equity is 16 percent, and the tax rate is 40 percent. What is its WACC? a) 12% b) 12.5% c) 13.5% d) 13%

d) 13%

The WACC is the overall rate of return the firm must earn on its existing assets to maintain the _ of its stock.

value

Which of the following are components used in the construction of the WACC? Select all that apply. a) Cost of debt b) Cost of accounts payable c) Cost of common stock d) Cost of preferred stock

a) Cost of debt c) Cost of common stock d) Cost of preferred stock

Which of the following is true about a firm's cost of debt? Select all that apply. a) It is easier to estimate than the cost of equity. b) Yields can be checked by using the DDE model. c) Yields can be calculated from observable data.

a) It is easier to estimate than the cost of equity. c) Yields can be calculated from observable data.

What will happen over time if a firm uses its overall WACC to evaluate all projects, regardless of each project's risk level? Select all that apply. a) It will reject projects that it should have accepted. b) It will accept projects that it should have rejected. c) Using the firm's WACC to evaluate all projects is appropriate. d) The firm's risk will not change over time e) The firm overall will become riskier.

a) It will reject projects that it should have accepted. b) It will accept projects that it should have rejected. e) The firm overall will become riskier.

The following are disadvantages of the SML approach: Select all that apply. a) Requires estimation of beta. b) Adjusts for risk. c) Does not require the company to pay a dividend. d) Requires estimation of the market risk premium.

a) Requires estimation of beta. d) Requires estimation of the market risk premium.

The return an investor in a security receives is _ _ the cost of the security to the company that issued it. a) equal to b) greater than c) less than d) unrelated to

a) equal to

To estimate a firm's equity cost of capital using the CAPM, we need to know the _. Select all that apply. a) risk-free rate b) stock's beta c) market risk premium d) annual dividend amount

a) risk-free rate b) stock's beta c) market risk premium

The growth rate of dividends can be found using: Select all that apply. a) the capital asset pricing model. b) historical dividend growth rates. c) the perpetuity model. d) security analysts' forecasts

b) historical dividend growth rates. d) security analysts' forecasts

The rate used to discount project cash flows is known as the _. Select all that apply. a) market rate b) required return c) discount rate d) cost of capital

b) required return c) discount rate d) cost of capital

If a firm is funded with $400 in debt and $1200 in equity, the weight of equity in the capital structure is _% and the weight of debt is _%. a) 35; 65 b) 25; 75 c) 75;25 d) 50; 50

c) 75;25

What can we say about the dividends paid to common and preferred stockholders? Select all that apply. a) Dividends are guaranteed for both preferred and common stockholders. b) Preferred stock dividends change every year based on the earnings of the firm. c) Dividends to common stockholders are not fixed. d) Dividends to preferred stockholders are fixed.

c) Dividends to common stockholders are not fixed. d) Dividends to preferred stockholders are fixed.

Which of the following are true? Select all that apply. a) Ideally, we should use book values in the WACC. b) Book values are often similar to market values for equity. c) The market value of debt and equity are not reliable in case of privately owned company. d) Ideally, we should use market values in the WACC.

c) The market value of debt and equity are not reliable in case of privately owned company. d) Ideally, we should use market values in the WACC.

If an all-equity firm discounts a project's cash flows with the firm's overall weighted average cost of capital even though the project's beta is less than the firm's overall beta, it is possible that the project might be: a) rejected, as it should be. b) accepted, as it should be. c) rejected, when it should be accepted. d) accepted, when it should be rejected.

c) rejected, when it should be accepted.

WACC was used to compute the following project NPVs: Project A= $100 Project B= -$50 Project C= -$10 Project D= $40 Which projects should the firm accept? a) B and C b) A, B, and C c) A only d) A and D

d) A and D

Dividends paid to common stockholders _ be deducted from the payer's taxable income for tax purposes. a) can b) may c) should d) cannot

d) cannot

If the firm is all-equity, the discount rate is equal to the firm's cost of _ capital. a) government b) derivative c) debt d) equity

d) equity

The dividend growth model is applicable to companies that pay _.

dividends