fin ch 13

the book value of a firms equity is $100 million and its market value of equity is $200 million. the face value of its debt is $50 million and its market value of debt is $60 million. what is the market value of assets of the firm?

$260 million market value of debt + market value of equity

Assume Bismuth Electronics has a book value of $6 billion of equity and a face value of $19.7 billion of debt. The market values of equity and debt are $2.5 billion and $18.5 billion. A Wall Street financial analyst determines values of equity and debt as $3 billion and $20 billion. Which of the following values should be used for calculating the firmʹs WACC? A) $6 billion of equity and $19.7 billion of debt B) $2.5 billion of equity and $20 billion of debt C) $3 billion of equity and $19.9 billion of debt D) $2.5 billion of equity and $18.5 billion of debt

D

One should use accounting-based book values rather than market values of debt and equity to determine the weights for the different sources of capital.

FALSE

To attract capital from outside investors, a firm must offer potential investors an expected return that is commensurate with the level of risk that they can bear.

TRUE

financial managers must determine their firm's overall cost of capital based on all sources of financing

TRUE

Anheuser Busch, a manufacturer of beverages, is planning to purchase Six Flags theme parks. Anheuser Busch should use the ________ to evaluate the business of Six Flags.

WACC of six flags

A firm's sources of financing, which usually consists of debt and equity, represent its ________.

capital

Different divisions with differing lines of business use different costs of capital because their cost of ________ could be different.

capital

For an unlevered firm, the cost of capital can be determined by using the ________. A) yield on the traded debt B) Capital Asset Pricing Model C) dividend yield D) preferred stock yield

capital asset pricing model

the relative proportion of debt, equity, and other securities that a firm has outstanding constitute its

capital structure

when calculating the WACC, it is a standard practice to subtract ____ to compute the net debt outstanding

cash and risk free securities

a levered firm is one that has ______ outstanding

debt

leverage is the amount of _____ on a firms balance sheet

debt

When we use the WACC to assess a project, we assume that the ________ ratio does not change. A) reward to systematic risk B) risk to reward C) debt to equity D) volatility to systematic risk

debt to equity

which of the following is NOT a step in the WACC valuation method?

determine the mean weighted average cost of capital for the firms industry

Divisional costs of capital are more appropriate when evaluating a project for a line of business when the types of business in a firm are

different

the fact that the after-cost of debt is lower than the pretax cost of debt implicitly assumes that interest expense can be

expensed

which of the following is false? A) issuance costs increase the WACC B) external equity is less expensive than retained earnings C) a project that can be financed with internal funds will be less costly than the same project if it were financed with external funds D) issuance costs should be treated as cash outflows in NPV analysis

external equity is less expensive than retained earnings

The fact that the interest paid on debt is a tax-deductible expense increases the cost of debt financing.

false

When a firm is evaluating the purchase of a business that is unrelated to its current business, it is appropriate to use the current WACC of the firm that is purchasing the business.

false

internal financing is more costly than external financing because of issuance costs

false

the WACC does not depend on the risk of a company's line of business

false

when corporate tax rates decline, the net cost of debt financing ______

increases

as a firm increases its level of debt relative to its level of equity, the firm is

increasings its leverage

the after-tax cost of debt ____ the before tax cost of debt for a firm that has a positive marginal tax rate

is always less than

When we compute the cost of equity capital for a project we assume that the ________ of the project is equivalent to the average market risk of the firmʹs investments.

market risk

different divisions with differing lines of business use different costs of capital because their cost of equity is different and also because the _____ could be different

optimal debt-equity ratio

A firm's cost of debt is the rate of interest it would have to pay to refinance its existing debt.

tRUE

Many financial managers use market risk premiums that are closer to 5%, which is lower than historical averages, because ________.

the return investors require as compensation for taking on the risk of investing in equity markets has diminished over a period of time

the after tax cost of equity is ______ the pretax cost of equity

the same as

firms that have many divisions with different lines of business do not use a companywide WACC to evaluate projects

true

the cost of external financing must be deducted from the net present value of a project to evaluate if it is worth undertaking

true

a firm raised all its capital via equity rather than debt. such a firm is also referred to as a _______ firm

unlevered

a firms overall cost of capital that is a blend of the costs of the different sources of capital is known as the firms

weighted average of capital

holding everything else constant, an increase in cash _____ a firms net debt

will decrease

the ____ of a firms debt can be used as the firms current cost of debt

yield to maturity