Ch. 14 Learnsmart
Which of the following are true?
1. Book values are often similar to market values for *debt* 2. We should use market values in the WACC
A company can deduct interest paid on debt when computing taxable income
Dividends are not tax deductible
If a firm uses its overall cost of capital to discount cash flows from higher risk projects, it will accept _____ projects
Too many high risk-risk
The best way to include flotation costs is to
add them to the initial investment
The discount rate for the firm's projects equals the cost of capital for the firm as a whole when...
all projects have the same risk as the current firm
Economic Value Added (EVA) uses the weighted average cost of capital to determine if value is:
being created or destroyed
The SML approach requires estimates of:
beta coefficient market risk premium
Flotation costs are costs incurred to
bring new security to the market
The return an investor in a security receives is _____ _____ the cost of the security to the company that issued it
equal to
In reality, most firms cover the equity portion of their capital spending with....
internally generated cash flows
The WACC is the minimum return a company needs to earn to satisfy:
its bondholders its stockholders
If the firm had so much debt that its equity was valueless, its average cost of capital would equal
its cost of debt
Other companies that specialize only in projects similar to the project your firm is considering are called
pure plays
A project should only be accepted if its return is above what is...
required by investors
The cost of capital is an appropriate name since a project must earn enough to pay those who ____ the capital
supply
WACC should be used when...
the project's risk is the same as the average risk of the firms current projects
According to CAPM, what is the expected return on a stock if its beta is equal to 0
the risk-free rate
To estimate the growth rate of a particular stock, we can
1. Use the historical dividend growth rate 2. use security analysts' forecasts
A firm's cost of debt can be...
1. obtained by checking yields on publicly traded bonds 2. obtained by talking to IB 3. estimated easier than the cost of equity
Rate used to discount project cash flows is known as the
1. Cost of Capital 2. Discount Rate 3. Required rate
What can we say about the dividends paid to common and preferred stockholders?
1. Dividends to common holders are *NOT* fixed 2. Dividends to preferred holders *ARE* fixed
To estimate a firm's equity cost of capital using CAPM, we need to know the ____
1. Risk-free rate 2. Stock's beta 3. market risk premium
The growth rate of dividends can be found using:
1. Security analysts' forecast 2. Historical dividend growth rates
Which of the following methods for calculating cost of equity ignores risk? A. CAPM B. Dividend growth model C. YTM
B. Dividend Growth Model
Dividends paid to common stockholders _____ be deducted from the payer's taxable income for tax purposes
cannot
If an all-equity firm discounts a project's cash flows with the firm;s overall WACC even though the project's beta is less than the firm's overall beta, it is possible the project might be:
rejected, when it should be accepted
An important advantage of a firm raising equity internally is not having to pay
flotation costs
