Ch

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

(P/V)*Rp

What is the equation for finding the cost of preferred stock

Rp = D/P0

What is the required return on a stock (Rs) according to the constant dividend growth model, if the growth rate (g) is zero

Rs = D1/P0

What does WACC stand for

Weighted average cost of capital

The growth rate of dividends can be found using a. historical dividend growth rates b. security analysis forecasts c. the capital asset pricing model d. the perpetuity model

a. historical dividend growth rates b. security analysis forecasts

to estimate a firms equity cost of capital using the CAPM, we need to know the (blank) a. stocks beta b. risk-free rate c. market risk premium d. annual dividend amount

a. stocks beta b. risk-free rate c. market risk premium

Which of the following is true about a firm's cost of debt? a. yields can be calculated from observable data b. yields can be checked by using the DDE model c. it is easier to estimate than the cost of equity

a. yields can be calculated from observable data c. it is easier to estimate than the cost of equity

What are two advantages of the SML approach

adjusts for risk and does not require the company to pay a dividend

WACC is used to discount (blank)

cash flows

if a firm issues no debt, its average cost of capital will equal

the cost of equity

according to the CAPM, what is the expected return on a stock if its beta is equal to zero?

the risk-free rate

If a firm uses its overall cost of capital to discount cash flows from projects in higher risk divisions, it will accept (blank) projects

too many

for a firm with outstanding debt, the cost of debt will be the (blank) on that debt

yield to maturity

MNO preferred stock pays a dividend of $2 per year and has a price of $20. If MNO's tax rate is 40%, the after tax rate of return on its preferred stock is a. 12% b. 6% c. 8% d. 10%

10%

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 % and the tax rate is 40% what is its WACC?

13% (0.7)*.16)+(0.3*.1*(1-0.4))=.13 or 13%

Which of the following are true a. ideally, we should use market value in the WACC b. book values are often similar to market values for equity c. ideally, we should use book values in the WACC d. book values are often similar to market values for debt

a. ideally, we should use market value in the WACC d. book values are often similar to market values for debt

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

cost of preferred stock cost of common stock cost of debt

The rate used to discount project cash flows is known as the (blank)

discount rate required return cost of capital

The return an investor in a security receives is (blank) the cost of the security to the company that issued it

equal to

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

equity

(t/f) projects should always be discounted at the firms overall cost of capital

false

Components of the WACC include funds that come from (blank)

investors

What will happen over time if a firm uses its overall WACC to evaluate all projects, regardless of each projects risk level?

it will reject projects that it should have accepted, the firm overall will become riskier, and it will accept projects that it should have rejected

The most appropriate weights to use in the WACC are the (blank) weights

market value

other companies that specialize only in projects similar to the project your firm is considering are called

pure plays

The WACC is the overall (BLANK) the firm must earn on its existing assets to maintain the (blank) of its stock

return, value