cost of equity
A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith, Inc. What is the return that these individuals require on this investment called?
cost of debt.
Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to as the:
weighted average cost of capital
The average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is called the:
pure play
When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach.
depends upon how the funds raised are going to be spent
A firms cost of capital
is the return investors require on the total assets of the firm
The weighted average cost of capital for a wholesaler
use of the funds
Which one of the following is the primary determinant of a firm's cost of capital?
by using the capital asset pricing model
Scholastic Toys is considering developing and distributing a new board game for children. The project is similar in risk to the firm's current operations. The firm maintains a debt-equity ratio of 0.40 and retains all profits to fund the firm's rapid grow
a reduction in the risk-free rate
All else constant, which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2.
highly dependent upon the growth rate and risk level of the firm.
A firm's overall cost of equity is:
ignores the firm's risks when that cost is based on the dividend growth model.
The cost of equity for a firm:
II, III, and IV only
The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations?
I. firms that have a 100 percent retention ratio
II. firms that pay a constant dividend
III. firms that pay an increasing dividend
IV. fir
is only as reliable as the estimated rate of growth.
The dividend growth model:
The model is dependent upon a reliable estimate of the market risk premium.
Which one of the following statements related to the SML approach to equity valuation is correct? Assume the firm uses debt in its capital structure.
II, III, and IV only
Which of the following statements are correct?
I. The SML approach is dependent upon a reliable measure of a firm's unsystematic risk.
II. The SML approach can be applied to firms that retain all of their earnings.
III. The SML approach assumes a firm's f
is based on the current yield to maturity of the firm's outstanding bonds.
The pre-tax cost of debt:
II and III only
The aftertax cost of debt generally increases when:
I. a firm's bond rating increases.
II. the market rate of interest increases.
III. tax rates decrease.
IV. bond prices rise.
return on a perpetuity.
The cost of preferred stock is computed the same as the:
is equal to the dividend yield.
The cost of preferred stock:
are based on the market value of the firm's debt and equity securities.
The capital structure weights used in computing the weighted average cost of capital:
The firm's cost of equity is unaffected by a change in the firm's tax rate.
Morris Industries has a capital structure of 55 percent common stock, 10 percent preferred stock, and 45 percent debt. The firm has a 60 percent dividend payout ratio, a beta of 0.89, and a tax rate of 38 percent. Given this, which one of the following st
has a greater effect on a firm's cost of capital when the debt-equity ratio increases.
The aftertax cost of debt:
I, II, III, and IV
The weighted average cost of capital for a firm may be dependent upon the firm's:
I. rate of growth.
II. debt-equity ratio.
III. preferred dividend payment.
IV. retention ratio.
rate of return a firm must earn on its existing assets to maintain the current value of its stock.
The weighted average cost of capital for a firm is the
The WACC should decrease as the firm's debt-equity ratio increases.
Which one of the following statements is correct for a firm that uses debt in its capital structure?
I, II, III, and IV
If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to:
I. reject some positive net present value projects.
II. accept some negative net present value projects.
III. favor high risk projects over low
assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.
Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 70 percent of the firm's overall sales. Division A is also the riskier of the two divisions. Division B is th
prefer higher risk projects over lower risk projects.
Markley and Stearns is a multi-divisional firm that uses its WACC as the discount rate for all proposed projects. Each division is in a separate line of business and each presents risks unique to those lines. Given this, a division within the firm will te
the risks associated with the use of the funds required by the project.
The discount rate assigned to an individual project should be based on:
may cause the firm's overall weighted average cost of capital to either increase or decrease over time.
Assigning discount rates to individual projects based on the risk level of each project:
A project that is unacceptable today might be acceptable tomorrow given a change in market returns.
Which one of the following statements is correct?
both Phil's and Theresa's
Phil's is a sit-down restaurant that specializes in home-cooked meals. Theresa's is a walk-in deli that specializes in specialty soups and sandwiches. Both firms are currently considering expanding their operations during the summer months by offering pre
neither Wilderness Adventures nor Travel Excitement
Wilderness Adventures specializes in back-country tours and resort management. Travel Excitement specializes in making travel reservations and promoting vacation travel. Wilderness Adventures has an aftertax cost of capital of 13 percent and Travel Excite
assigns discount rates to projects based on the discretion of the senior managers of a firm.
The subjective approach to project analysis:
Overall, a firm makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.
Which one of the following statements is correct?
increase the initial project cost by dividing that cost by (1 - 0.07).
When a firm has flotation costs equal to 7 percent of the funding need, project analysts should:
the weighted average of the flotation costs associated with each form of financing.
The flotation cost for a firm is computed as:
increase the initial cash outflow of the project.
Incorporating flotation costs into the analysis of a project will:
be weighted and included in the initial cash flow.
Flotation costs for a levered firm should: