According to the CAPM, what is the expected return on a stock if its beat is equal to zero?
Answer: The risk-free rate.
According to the CAPM, what is the expected return on a stock if its beat is equal to zero?
Answer: The risk-free rate.
Answer: The risk-free rate.
Other companies that specialize only in projects similar to the project your firm is considering are called ______.
Other companies that specialize only in projects similar to the project your firm is considering are called ______.
Answer: Pure plays
If an analyst's forecast for a firm's earnings growth is 7 percent, and its dividend yield is 3 percent, its cost of equity will be ______.
If an analyst's forecast for a firm's earnings growth is 7 percent, and its dividend yield is 3 percent, its cost of equity will be ______.
Answer: 3% + 7% = 10%
Which of the following is Tax-deductible to the firm?
Which of the following is Tax-deductible to the firm?
Answer: Coupon Interest paid on bonds.
Suppose the risk-free rate is 5.5%, the market rate of return is 8.5%, and beta is 1.25%. Find the required rate of return using CAPM.
Suppose the risk-free rate is 5.5%, the market rate of return is 8.5%, and beta is 1.25%. Find the required rate of return using CAPM.
Answer: 5.5% +( 1.25 * (8.5 % - 5.5%) = 9.25%
The cost of capital primarily on the _______ of funds, NOT the ______.
The cost of capital primarily on the _______ of funds, NOT the ______.
Answer: Use; source
A company has a borrowing rate of 15 percent and a tax rate of of 30 percent. What is its aftertax cost of debt?
A company has a borrowing rate of 15 percent and a tax rate of of 30 percent. What is its aftertax cost of debt?
Answer: 15% * (1 - 0.3) = 10.5%
Some risk adjustment to a firm's WACC for projects of differing risk, even if it is subjective, is probably?
Some risk adjustment to a firm's WACC for projects of differing risk, even if it is subjective, is probably?
Answer: Better than NO risk adjustment.
To estimate the dividend yield of a particular stock, we need?
To estimate the dividend yield of a particular stock, we need?
Answer:
1. The current stock price.
2. The last dividend paid, D0.
3. Forecasts the dividend growth rate, g.
Finding a firm's overall cost of equity is difficult because:
Finding a firm's overall cost of equity is difficult because:
Answer: It cannot be observed directly.
The rate to discount project cash flows is known as the ____?
The rate to discount project cash flows is known as the ____?
Answer:
1. Cost of Capital
2. Discount Rate.
3. Required Return
The following are DIS-ADVANTAGES of the SML approach?
The following are DIS-ADVANTAGES of the SML approach?
Answer:
1. Required estimation of beta.
2. Required estimation of the market risk premium.
The following are ADVANTAGES of the SML approach?
The following are ADVANTAGES of the SML approach?
Answer:
1. Adjust for risk.
2. Does NOt require the company to pay a dividend
If a firm uses its overall cost of capital to discount cash flows from projects in HIGHER RISK divisions, it will accept_______ projects.
If a firm uses its overall cost of capital to discount cash flows from projects in HIGHER RISK divisions, it will accept_______ projects.
Answer: too many
The WACC is the minimum required return for ______.
The WACC is the minimum required return for ______.
Answer: the overall firm.
If a firm issues no debt, its average cost of capital will equal _____?
If a firm issues no debt, its average cost of capital will equal _____?
Answer: it cost of equity
The return an investor in a security received is _______, _______ the cost of the security to the company that issued it.
The return an investor in a security received is _______, _______ the cost of the security to the company that issued it.
Answer: equal to
Preferred stock ________?
Preferred stock ________?
Answer:
1. Pays dividends in perpetuity.
2. Pays a constant dividend.
The growth rate of dividends can be found using:
The growth rate of dividends can be found using:
Answer:
1. Security analyst's forecasts.
2. Historical dividend growth rates.
What is the required return on stock (Re), according to the constant dividend growth model, if the growth rate (g) is zero?
What is the required return on stock (Re), according to the constant dividend growth model, if the growth rate (g) is zero?
Answer: Re - D1/P0
If an ALL_EQUITY firm discounts a project's cash flows with the form's overall weighted average cost capital even though the project's beta is less than the form's overall beat, it is possible that the project might be:
If an ALL_EQUITY firm discounts a project's cash flows with the form's overall weighted average cost capital even though the project's beta is less than the form's overall beat, it is possible that the project might be:
Answer: Rejected, when it should be accepted.
Suppose a firm's capital structure consists of 30% debt, 10% preferred stock and 60% equity. the form's bond yield 10% on average before taxes, the cost preferred stock is 8% and the cost of equity is 16%. Calculate the form's WACC assuming a tax rate of 40%.
Suppose a firm's capital structure consists of 30% debt, 10% preferred stock and 60% equity. the form's bond yield 10% on average before taxes, the cost preferred stock is 8% and the cost of equity is 16%. Calculate the form's WACC assuming a tax rate of 40%.
Answer: (0.6 16%+0.310% (1-0.4)+0.18% = 12.20%.
Components of the WACC include funds that come from _____?
Components of the WACC include funds that come from _____?
Answer: investors
Dividends paid to common stockholders ______ be deducted from the payer's taxable income for tax purposes.
Dividends paid to common stockholders ______ be deducted from the payer's taxable income for tax purposes.
Answer: cannot
To estimate a firm's equity cost of capital using the CAPM, we need to know the ______?
To estimate a firm's equity cost of capital using the CAPM, we need to know the ______?
Answer:
1. Risk-free Rate.
2. Market Risk Premium
3 Stock's beta
The most appropriate weights to use in the WACC are the _________ weights.
The most appropriate weights to use in the WACC are the _________ weights.
Answer: market value
What will happen over time if a firm uses its overall WACC to evaluate all projects, regardless of each project's risk level?
What will happen over time if a firm uses its overall WACC to evaluate all projects, regardless of each project's risk level?
Answer:
1. It will reject projects that it should have accepted..
2. It will accept projects that it should have accepted.
3. The firm's overall will become riskier.
WACC was used to compute the following project NPVs: Project A = $100, Project B= -$50, Project C = -$40, and project D = $110. Which projects should the firm accept?
WACC was used to compute the following project NPVs: Project A = $100, Project B= -$50, Project C = -$40, and project D = $110. Which projects should the firm accept?
Answer: Project A & D.
The WACC is the overall __________ the firm must earn on its existing assets to maintain the _________ of its stock.
The WACC is the overall __________ the firm must earn on its existing assets to maintain the _________ of its stock.
Answer: return, value
To apply the dividend Discount model to a particular stock, you need to estimate the ____?
To apply the dividend Discount model to a particular stock, you need to estimate the ____?
Answer:
1. Growth rate.
2. Dividend Yield.
If D is the market value of a firm's debt, E the market value of that same firm's equity, V the total value of the firm (E+ D), Rd the yield on the first debt, Tc is the corporate tax rate, and Re the cost of equity, the weighted average cost of capital is:
If D is the market value of a firm's debt, E the market value of that same firm's equity, V the total value of the firm (E+ D), Rd the yield on the first debt, Tc is the corporate tax rate, and Re the cost of equity, the weighted average cost of capital is:
Answer: [E/D] x Re + [D/E] x Ro x (1 - Tc).
In many cases, the dividend growth model approach is _________.
In many cases, the dividend growth model approach is _________.
Answer: useless
Which of the following is true about a firm's cost of debt?
Which of the following is true about a firm's cost of debt?
Answer:
1. It is easier to estimate than the cost of equity.
2. Yields can be calculated from observable data.
What does WACC stands for?
What does WACC stands for?
Answer: Weighted Average Cost of Capital.
According to __________ , the value of the firm is independent of its capital structure.
According to __________ , the value of the firm is independent of its capital structure.
Answer: M&M Proposition I without taxes.
The optimal capital structure is the mixture of debt and equity which:
The optimal capital structure is the mixture of debt and equity which:
Answer: Maximizes the value of the firm and Minimizes the firm's weighted average cost of capital.
Which of the following statements regarding leverage is false?
Which of the following statements regarding leverage is false?
Answer: If things go poorly for the firm, increased leverage provides greater returns to shareholders (as measured by ROE and EPS).
According to the static theory of capital structure, ___.
According to the static theory of capital structure, ___.
Answer: The value of the firm in M&M with taxes is overstated by the amount of financial distress costs
Assume there are no personal or corporate income taxes and that the firm's WACC is unaffected by changes in the firm's capital structure. Which of the following is true?
Assume there are no personal or corporate income taxes and that the firm's WACC is unaffected by changes in the firm's capital structure. Which of the following is true?
Answer: A firm's cost of equity depends on the firm's business and financial risks.
Which of the following correctly completes the following: M&M I with taxes shows _____.
Which of the following correctly completes the following: M&M I with taxes shows _____.
Answer: there is a linear relationship between the amount of debt in a levered.
Assume there are no personal or corporate income taxes and that the firm's WACC is unaffected by its capital structure. Which of the following is true?
Assume there are no personal or corporate income taxes and that the firm's WACC is unaffected by its capital structure. Which of the following is true?
Answer: firm's cost of equity depends on the firm's business and financial risks.
All else the same, the financial leverage of a firm will ______.
All else the same, the financial leverage of a firm will ______.
Answer: decrease as the firm's retained earnings account grows.
Assume there are no corporate or personal taxes. According to M&M Proposition:
Assume there are no corporate or personal taxes. According to M&M Proposition:
Answer: The cost of equity rises as the firm increases its use of debt financing.
Which of the following is NOT accurate regarding financial leverage?
Which of the following is NOT accurate regarding financial leverage?
Answer: Increasing financial leverage will always increase the EPS for stockholders.
The firm is considering two projects A and B. Both projects have conventional cash flows. Project A has beta of 1.0 and it has an IRR (promised return) of 13.0%. Project B has a beta of 1.5 and it has an IRR of 15.0%. If the risk-free rate is 5.25% and the market risk premium is 7.0%, which project(s) should the firm take?
The firm is considering two projects A and B. Both projects have conventional cash flows. Project A has beta of 1.0 and it has an IRR (promised return) of 13.0%. Project B has a beta of 1.5 and it has an IRR of 15.0%. If the risk-free rate is 5.25% and the market risk premium is 7.0%, which project(s) should the firm take?
Answer: Project A
Which of the following is true about the WACC?
Which of the following is true about the WACC?
Answer: The value of the firm will be maximized when the WACC is minimized.
The equity risk derived from the firm's operating activities is called
The equity risk derived from the firm's operating activities is called
Answer: business.
The interest rate that should be used when evaluating a capital
The interest rate that should be used when evaluating a capital
Answer: appropriate discount rate and cost of capital.
You need to calculate the cost of equity capital for a firm that is traded on the New York Stock Exchange. Which of the following would likely be least helpful to you?
You need to calculate the cost of equity capital for a firm that is traded on the New York Stock Exchange. Which of the following would likely be least helpful to you?
Answer: Knowledge of the stock's price six months ago.
Which of the following is NOT true regarding a firm's cost of debt?
Which of the following is NOT true regarding a firm's cost of debt?
Answer: A firm's cost of equity is generally easier to calculate than a firm's cost of debt.
Which of the following is NOT correct?
Which of the following is NOT correct?
Answer: Book value capital structure weights should be used to calculate the WACC rather than market value weights.
These days the stock market is worried that Federal Reserve is expected to take actions that cause the risk-free rate to increase. If all else the same,including the level of market required return, we would expect a firm's cost of equity to _______.
These days the stock market is worried that Federal Reserve is expected to take actions that cause the risk-free rate to increase. If all else the same,including the level of market required return, we would expect a firm's cost of equity to _______.
Answer: either increase or decrease if we are using the SML, but we can't determine which without information about the firm's beta.
New York Deli has 7 percent preferred stock outstanding that sells for $34 a share. This stock was originally issued at $45 per share. What is the cost of preferred stock?
New York Deli has 7 percent preferred stock outstanding that sells for $34 a share. This stock was originally issued at $45 per share. What is the cost of preferred stock?
Answer: 20.59 percent
Samuelson Plastics has 7.5 percent preferred stock outstanding. Currently, this stock has a market value per share of $52 and a book value per share of $38. What is the cost of preferred stock?
Samuelson Plastics has 7.5 percent preferred stock outstanding. Currently, this stock has a market value per share of $52 and a book value per share of $38. What is the cost of preferred stock?
Answer: 14.42 percent
Grill Works and More has 7 percent preferred stock outstanding that is currently selling for $49 a share. The market rate of return is 14 percent and the firm's tax rate is 37 percent. What is the firm's cost of preferred stock?
Grill Works and More has 7 percent preferred stock outstanding that is currently selling for $49 a share. The market rate of return is 14 percent and the firm's tax rate is 37 percent. What is the firm's cost of preferred stock?
Answer: 14.29 percent
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 statements is correct?
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 statements is correct?
Answer: The firm's cost of equity is unaffected by a change in the firm's tax rate.
The cost of preferred stock:
The cost of preferred stock:
Answer: is equal to the dividend yield.
The cost of preferred stock is computed the same as the:
The cost of preferred stock is computed the same as the:
Answer: return on a perpetuity.
Stock in Country Road Industries has a beta of 0.97. The market risk premium is 10 percent while T-bills are currently yielding 5.5 percent. Country Road's most recent dividend was $1.55 per share, and dividends are expected to grow at a 7 percent annual rate indefinitely. The stock sells for $32 a share. What is the estimated cost of equity using the average of the CAPM approach and the dividend discount approach?
Stock in Country Road Industries has a beta of 0.97. The market risk premium is 10 percent while T-bills are currently yielding 5.5 percent. Country Road's most recent dividend was $1.55 per share, and dividends are expected to grow at a 7 percent annual rate indefinitely. The stock sells for $32 a share. What is the estimated cost of equity using the average of the CAPM approach and the dividend discount approach?
Answer: 13.69 percent
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.
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.
Answer: a reduction in the risk-free rate
The optimal capital structure has been achieved when the:
The optimal capital structure has been achieved when the:
Answer: debt-equity ratio results in the lowest possible weighted average cost of capital.
Electronics Galore has 950,000 shares of common stock outstanding at a market price of $38 a share. The company also has 40,000 bonds outstanding that are quoted at 106 percent of face value. What weight should be given to the debt when the firm computes its weighted average cost of capital?
Electronics Galore has 950,000 shares of common stock outstanding at a market price of $38 a share. The company also has 40,000 bonds outstanding that are quoted at 106 percent of face value. What weight should be given to the debt when the firm computes its weighted average cost of capital?
Answer: 54%
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