If the risk-free rate is 4 percent, an all-equity firm's beat is 2, and the market risk premium is 6 percent, what is the firm's cost of capital?

If the risk-free rate is 4 percent, an all-equity firm's beat is 2, and the market risk premium is 6 percent, what is the firm's cost of capital?

Answer: 4% + 2 * 6% = 16%

Suppose the risk-free rate is 5%, the market rate of return is 10%, and beta is 2%. Find the required rate of return using CAPM.

Suppose the risk-free rate is 5%, the market rate of return is 10%, and beta is 2%. Find the required rate of return using CAPM.

Answer: 5% + (2*(10%-5%)) = 10%

MNO preferred stocks pays dividend of $2 per year and gas a price of $20. If MNO's tax rate is 40%, the Aftertax rate of return om its preferred stock is:

MNO preferred stocks pays dividend of $2 per year and gas a price of $20. If MNO's tax rate is 40%, the Aftertax rate of return om its preferred stock is:

Answer: 10%

According to the CAPM, what is the expected return on a stock if its beat is equal to zero?

According to the CAPM, what is the expected return on a stock if its beat is equal to zero?

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