Intermediate Finance T/F -- Chapter 13
The interest tax shield generated by a project's actual equity financing is accounted for by using the after-tax cost of equity in the WACC.
False
The mix of a company's short-term financing is referred to as its capital structure.
False
A firm's cost of capital will generally increase if the firm lowers its debt-equity ratio.
True
As a firm increases its debt ratio, debtholders are likely to demand higher rates of return.
True
Assuming a project has the same risk and financing as the firm, it will have a positive NPV if its rate of return is greater than the firm's WACC.
True
Both the capital asset pricing model and the dividend discount model can be used to determine the cost of equity financing.
True
Capital structure refers to a firm's mix of long-term debt and equity financing.
True
The cost of equity will generally increase for risky firms when the risk-free rate of return increases.
True
A change in the company's capital structure will change the amount of taxes paid but will not change the WACC.
False
A firm's cost of capital should be computed using the book weights of each financing source.
False
A firm's cost of capital should be used as the discount rate for every new project the firm considers.
False
An increase in a firm's debt ratio will have no effect on the required rate of return for equityholders.
False
If the firm decreases its debt ratio, both the debt and the equity will become riskier. The debtholders and equity holders will require a higher return to compensate for the increased risk.
False
Interest tax shields are available to the firm on debt and preferred stock but not on common equity.
False
New projects should be undertaken by firms only if they have the same risk as existing assets.
False
Preferred stock should be ignored when computing a firm's weighted-average cost of capital.
False
The company cost of capital is the minimum acceptable rate of return for any project the firm undertakes.
False
For most healthy firms, the YTM on their bonds is the rate of return investors expect from holding their bonds to maturity.
True
If a project has a zero NPV when the expected cash flows are discounted at the weighted-average cost of capital, then the project's cash flows are just sufficient to give debtholders and shareholders the return they require.
True
One way to check the accuracy of the expected return on bonds is to compare the expected return to the YTM on recently-issued bonds with similar characteristics and risks.
True
Projects that have a zero NPV when calculated at the WACC will provide sufficient returns to creditors and shareholders.
True
The WACC is the rate of return that the firm must expect to earn on its average-risk investments in order to provide an acceptable return to its security holders.
True
The company cost of capital is the expected rate of return that investors demand from the company's assets and operations.
True
The weighted-average cost of capital is the return the company needs to earn after tax in order to satisfy all its security holders.
True
There are two costs of debt finance. The explicit cost of debt is the rate of interest that bondholders demand. But there is also an implicit cost, because higher levels of debt increase the required rate of return to equity.
True
To a company, the cost of interest payments on its bonds is reduced by the amount of tax savings generated by that interest.
True
Weighted-average cost of capital is the expected rate of return on a portfolio of all the firm's securities, adjusted for tax savings related to interest payments.
True
When using the WACC as a discount rate, it is often adjusted upward for riskier projects and downward for safer projects.
True
