fina 3824 quiz 7: WACC and flotation costs

The weighted average cost of capital for a firm is dependent upon the firm's: I. level of systematic risk. II. debt-equity ratio. III. preferred dividend amount. IV. outstanding bonds' yield to maturity

I, II, III, IV

The aftertax cost of debt generally increases when: I. a firm's bond rating increases. II. the market rate of interest increases. III. tax rates decrease. IV. bond prices rise.

II and III only -the market rate of interest increases -tax rates decrease

Which of the following statements are correct concerning the security market line (SML) approach to determining the cost of equity for a firm?: I. The SML approach considers the amount of unsystematic risk associated with a firm. II. The SML approach can be applied to more firms than the dividend growth model can. III. The SML approach considers only future information. IV. The SML approach assumes the reward-to-risk ratio is constant

II and IV only -the SML approach can be applied to more firms than the dividend growth model can -the SML approach assumes the reward-to-risk ratio is constant

All else constant, which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $2.10 a share and has a beta of 1.1.

an increase in the market rate of return

the capital structure weights used in computing the weighted average cost of capital:

are based on the market value of the firm's debt and equity securities

the cost of equity for a firm is:

based on estimates derived from financial models

the weighted average cost of capital for a firm is the:

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

the return lenders require on loaned funds to a firm is called the:

cost of debt

the return shareholders require on their investment in a firm is called the:

cost of equity

incorporating flotation costs into the initial cash flow of a project will:

increase the initial cash outflow of the project thereby lowering the project's net present value

the pre-tax cost of debt for a firm:

is based on the yield to maturity on the firm's outstanding bonds

the cost of preferred stock is computed the same as the:

return on a perpetuity

DTK, Inc. uses both preferred and common stock as well as long-term debt to finance its operations. An increase in which one of the following will increase the capital structure weight of the debt, all else equal?:

number of bonds outstanding

which statement is correct concerning the weighted average cost of capital (WACC):?

the WACC may decrease as a firm's debt-equity ratio increases

the flotation cost for a firm is computed as:

the weighted average of the flotation costs associated with each form of financing