FIN WACC
The value of the firm is maximized when the weighted average cost of capital (WACC) is _______________
minimized
With a share repurchase, earnings per share will increase, and total earnings will _____. decrease increase not change fluctuate randomly
not change
In the absence of taxes, the value of a firm is the same with debt financing as it is with equity financing because ___. the asset to be financed is the same equity financing is actually better than debt financing MM demonstrated that debt financing is neither better nor worse than equity financing in the absence of taxes debt financing is actually better than equity financing.
the asset to be financed is the same MM demonstrated that debt financing is neither better nor worse than equity financing in the absence of taxes
A dividend _______ is the amount of the dividend expressed as a percentage of the stock's market price,
yield
Capital _________ weights can be interpreted just like portfolio weights.
structure
What does WACC stand for?
weighted average cost of capital
MNO preferred stock pays a dividend of $2 per year and has a price of $20. If MNO's tax rate is 21 percent, the required rate of return on its preferred stock is found by which formula? $2/$20 $2/.21 $20/.21 $20 - $2
$2/$20
According to the Tax Cuts and Jobs Act of 2017, after 2021, the net interest deduction drops to what percent of EBIT? 50 100 0 30
30%
In 2019, the net interest deduction is limited to what percent of EBITDA?
30%
Which of the following are consequences of nonpayment of debt obligations? Debt obligations will be repaid by the FDIC. A firm may be forced to file for bankruptcy. The firm will encounter some form of financial distress A firm may be taken over by the local government.
A firm may be forced to file for bankruptcy. The firm will encounter some form of financial distress
Which of the following are components used in the construction of the WACC? Cost of common stock Cost of preferred stock Cost of debt Cost of accounts payable
Cost of common stock Cost of preferred stock Cost of debt
A firm's overall cost of capital will include both its cost of ________ and equity capital
DEBT
A firm can pay out its cash earnings to its shareholders in which of the following ways? Stock dividends Dividends Share repurchase Stock splits
Dividends Share repurchase
Dividends received by shareholders are expressed in which of the following ways? Dividends per shareholder Dividends per share Dividend payout Dividend yield
Dividends per share Dividend payout Dividend yield
True or false: Dividends are irrelevant.
False
Which of the following are true? Ideally, we should use book values in the WACC. Ideally, we should use market values in the WACC. Book values are often similar to market values for debt. Book values are often similar to market values for equity.
Ideally, we should use market values in the WACC. Book values are often similar to market values for debt.
True or false: The return an investor in a security receives is equal to the cost of the security to the company that issued it.
True
The cost of capital depends primarily on the _________ (use/source) of funds
USE
In a repurchase, a shareholder pays taxes only if the shareholder _____. has a capital gain on the sale and declines the repurchase actually chooses to sell and the shareholder has lost money on the stock is forgiven of his/her debt and has a capital gain actually chooses to sell and the shareholder has a capital gain on the sale
actually chooses to sell and the shareholder has a capital gain on the sale
Homemade dividends allow a stockholder to change the ______. return earned by the shareholder on their stock by increasing the value of each share amount of the dividends paid per share by the issuer cash payout received by selling shares to receive current cash or purchasing additional shares to reduce current cash
cash payout received by selling shares to receive current cash or purchasing additional shares to reduce current cash
The most well-known approach to company performance evaluation is the _____ method.
economic value added
A stock's price will ______ when the ex-dividend date arrives. rise fall freeze gyrate
fall
______ is the term that describes the capital structure when debt is used to finance assets.
financial leverage
A regular cash dividend is commonly paid _____ times per year.
four
The crux of dividend policy is whether the firm should pay out money to its shareholders or take that money and _____.
invest it for shareholders
The manager of a firm should change the capital structure if and only if ___.
it increase the value of the firm
The expected return on equity is _____ to leverage. positively related unrelated negatively related
positively related
With a share ________, the number of outstanding shares decreases, while there is no impact on the total earnings, so EPS rises.
repurchase
If the dividend per share at a given date is raised and the dividends and other factors at every other date remain the same, then the stock price will
rise
Volatility or ______ increases for equity holders when leverage increases.
risk
MM Proposition II shows that ___.
the cost of equity rises with leverage
A beneficial rule to follow is to set the firm's capital structure so that ___.
the firm's value is maximized
True or false: If there are no imperfections, then a cash dividend and a share repurchase are the same to investors.
true
True or false: Nonpayment of periodic interest on debt can lead to bankruptcy.
true
A firm's cost of debt can be estimated easier than its cost of equity obtained by talking to investment bankers obtained by checking yields on publicly traded bonds calculated using the dividend growth model
*obtained by checking yields on publicly traded bonds *estimated easier than its cost of equity *obtained by talking to investment bankers
The formula for calculating the cost of equity capital that is based on the dividend discount model is:
RE = D1/P0 + g
Which question lies at the heart of dividend policy? Should the firm invest the money in the stock market or in a certificate of deposit? Should the firm pay out money to its shareholders or invest the money back into the company? Should the firm pay higher salaries or higher more people? Should the firm pay out money to its shareholders or donate the money to the local food bank?
Should the firm pay out money to its shareholders or invest the money back into the company?
Which of the following is likely to be true when a bankruptcy ruling is issued? the ownership of assets is transferred from the bondholders to the shareholders. The ownership of assets is transferred from the shareholders to the bondholders. There is no change in the ownership of assets. The ownership of assets is transferred from the shareholders to the federal government
The ownership of assets is transferred from the shareholders to the bondholders.
The equity risk that comes from the nature of a firm's operating activities is known as _____ risk. portfolio stand-alone financial business
business
WACC is used to discount ____________
cash flows
In order to receive a dividend, a stockholder must purchase stock before a certain date. That date is called the ___. declaration date ex-dividend date date of payment date of record
ex-dividend date
True or false: It is easy to measure indirect costs of financial distress.
false
The equity risk that comes from the financial policy or capital structure decisions of the firm is known as _____ risk.
financial
A(n) _____ dividend policy is created by individual investors who undo corporate dividend policy by reinvesting dividends or selling shares of stock.
homemade
When discounting the cash flows of a project at the WACC to estimate NPV, we need to find an alternative in the financial markets that is _____ as the given project. the exact same in the same risk class twice as risky half as risky
in the same risk class
In the presence of corporate taxes, the tax shield effect of debt will ____ the value of the firm.
increase
The dividend policy question addresses whether the firm should pay out a _____.
larger or smaller percentage of its earnings now
The most appropriate weights to use in the WACC are the ______ weights. market value salvage value government mandated book value
market value
A dividend can be in the form of cash or ______.
stock
When calculating the cash flow for a levered firm, you must consider _____. cash flows to both bondholders and stockholders cash flows to both bondholders and all stakeholders dividends paid to stockholders only interest paid to bondholders only
cash flows to both bondholders and stockholders
True or false: The cost of debt on the market value basis is typically much higher than the cost of debt on the book value basis.
false
Under MM Proposition II, a firm's cost of equity capital is ______ related to the firm's debt-equity ratio provided the cost of capital for an all-equity firm exceeds the cost of debt. negatively indirectly not positively
positively
During bankruptcy, the ownership of the firm's assets is transferred from stockholders to ___.
bondholders
Including preferred stock in the WACC adds the term: [P/(E + D)] × RP (P/V) × RP (V/P) × RP
(P/V) × RP
WACC was used to compute the following project NPVs: Project A = $100, Project B = -$50, Project C = -$10, Project D = $40. Which projects should the firm accept? A, B, and C A only B and C A and D
A and D
Which of the following assumptions is necessary for MM Proposition I to hold? Personal taxes must be lower than corporate taxes. Interest rates must be low. Individuals can borrow on their own at an interest rate equal to that of the firm. Managers must be acting to maximize the value of the firm.
Individuals can borrow on their own at an interest rate equal to that of the firm.
What is the likely impact on a stock's price when dividends are paid? The price will rise. The price will not be affected. The price will fall.
The price will fall.
Which of the following variables is not required to calculate the expected return on a risky asset? The stock's beta The risk-free rate The rate of inflation The market risk premium
The rate of inflation
The cost of __________ can be observed because it is the interest rate the firm must pay on new loans.
debt
The date on which the company passes a resolution to pay a dividend is called the ___________ date.
declaration
The two broad types of costs of financial distress are ___ costs.
direct and indirect
To apply the dividend growth model to a particular stock, you need to assume that the firm's ___ will grow at a constant rate. dividend debts profitability beta
dividend
The return an investor in a security receives is ______ the cost of the security to the company that issued it. Greater than Less than Equal to Unrelated to
equal to
The value of the firm is given by the following expression _____. firm value= value of assets - value of debt firm value = value of equity + value of assets firm value = value of equity firm value = value of equity + value of debt
firm value = value of equity + value of debt
In a perfect market, stockholders are ________ between a stock _______ and a cash _________.
indifferent, repurchase, dividend
An alternative way to pay out a firm's earnings to shareholders instead of cash dividends is a _____. stock split merger stock repurchase payment-in-kind
stock repurchase
To estimate the expected return on a risky asset, we need to know the ___. stock's beta market risk premium risk-free rate annual dividend amount
stock's beta market risk premium risk-free rate
One of the important reasons why firms choose to raise capital by issuing debt is because of the ______ benefits of debt. safety stabilizing tax
tax
A firm's capital structure refers to ___. how the firm invests its capital the firm's mix of debt and equity the amount of capital in the firm the amount of cash in a firm
the firm's mix of debt and equity
What can we say about the dividends paid to common and preferred stockholders? Dividends to common stockholders are not fixed. Dividends to preferred stockholders are fixed. Dividends are guaranteed for both preferred and common stockholders. Preferred stock dividends change every year based on the earnings of the firm.
Dividends to common stockholders are not fixed. Dividends to preferred stockholders are fixed.
The cost of capital depends on the _____ of funds, not the _____ of funds. source; use use; source
use; source
M&M Proposition I does not work with corporate taxes because ___. dividends are tax deductible levered firms pay lower taxes than unlevered firms levered firms pay more taxes than unlevered firms
levered firms pay lower taxes than unlevered firms
A company should select the capital structure that _____.
maximizes the company's value
The value of the firm is maximized when the weighted average cost of capital (WACC) is _____.
minimized
Preferred stock ___. pays a constant dividend does not pay dividends pays dividends in perpetuity has a fixed maturity
pays a constant dividend pays dividends in perpetuity
Finding a firm's overall cost of equity is ___________ (difficult/easy)
difficult
A strong argument can be made that _____. dividend policy does not matter dividends should be paid to bondholders dividends should never be paid to shareholders stock dividends are better than cash dividends
dividend policy does not matter
The most well-known approach to company performance evaluation is the _____ method. value adjusted economic value added economic regressive
economic value added
Finding a firm's overall cost of equity is difficult because _____. there is no way to estimate it it extensively requires the use of differential equations there is no way of directly observing the return that the firm's equity investors require on their investment the federal government refuses to disclose equity costs unless the firm is in the real estate sector
there is no way of directly observing the return that the firm's equity investors require on their investment
