Finance CH12

A firm's capital structure consists of 30% debt and 70% equity. Its bonds yield 10%, pretax its cost of equity is 16% and the tax rate is 40%. What is the WACC?

(.7*16%)+([.3*10%]*[1-.4]) = 13%

Including preferred stock in the WACC formula adds which term if P is the market Value of preferred stock and Rp is the cost preferred?

(P/V) * Rp

A firm's capital structure consists of 40% debt and 60% equity. aftertax yield on debt is 2.5% and the cost of equity is 15%. the project is about as risky as the overall firm. What discount rate should be used to estimate the project's net present value?

10%

Sigma corps consists of two divisions: A and B. D. A is riskier than D.B. If sigma corp uses the firm's overall WACC to evaluate both divisions' projects, which division will probably not receive enough resources to fund all of its potentially profitable projects?

Division B

Which of the following is true about a firms cost of debt?

It is easier to estimate than the cost of equity and yields can be calculated from observable data

formula for calculating the cost of equity capital that is based on the dividend discount model is:

Re=D1/Po+g

whats the equation for finding the cost of preferred stock?

Rp=D/Po

What does WACC stand for?

Weighted average cost of capital

If a firm has multiple projects, each project should be discounted using_______.

a discount rate commensurate with the project's risk

Dividends paid to common stockholders_____ be deducted from the payer's taxable income for tax purposes.

cannot

Which of the following are components used in the construction of the WACC?

cost of common stock, cost of debt and cost of preferred stock

Which of the following are tax-deductible to the firms?

coupon interest paid on bonds

the rate used to discount project cash flows is known as the _____.

discount rate, cost of capital and required return

to apply the dividend discount model to a particular stock, you need to estimate the

dividend yield and the growth rate

if the firm is all-equity, the discount rate is equal to the firm's cost of ________ capital

equity

Which of the following are true?

ideally we should use market values in the WACC and book values are often similar to market values for debt

Components of the WACC include funds that come from

investors

finding a firm's overall cost of equity is difficult because

it cannot be observed directly

If A Firm issues no debt, its average cost of capital will equal______

its cost of equity

most appropriate weights to use in the WACC are the _____ weights

market value

preferred stock

pays a constant dividend and pays dividends in perpetuity

the growth rate of dividends can be found using

security analysts' forecasts and historical dividend growth rates

to estimate a firms equity cost of capital using the CAPM, we need to know the

stock's beta, risk free rate and the market risk premium.

the cost of capital depends primarily on the _________ of funds not the ________.

use; source