Upgrade to remove ads
Only $35.99/year

FIN 3403 CH 14 TB

Terms in this set (39)

a group of individuals got together and purchased all of the outstanding shares of common stock of DL smith. What is the return that these individuals require on this investment called?
cost of equity
Textile mills borrows money at a rate of 13.5 percent, this rate is referred to as the:
cost of debt
The average of a firms cost of equity and aftertax cost of debt that is weighted based on the firms capital structure is called the
weighted average cost of capital
when manager develops a cost of capital for specific projects based on the cost of capital for another firm which has a similar line of business as the project, the manager is using the what approach?
pure play
a firms cost of capital
depends on how the funds raised are going to be spent
the weighted average cost of capital for a wholesaler
is the return investors require on the total assets of the firm
which one of the following is the primary determinant of a firms cost of capital?
use of the funds
scholastic toys is considering developing a distributing new board game for children
by using the capital asset pricing model
all else constant, which of the following will increase a firms cost of equity if the firm computes that cost using the security market approach?
a reduction in the risk free rate
a firms overall cost of equity is
highly dependent upon the growth rate and risk level of the firm
the cost of equity for a firm:
ignores the firms risks when that cost is based on the dividend growth model
the dividend growth model can be used to compute the cost of equity for a firm in which of the following situations?
2,3,4 only
the dividend growth model:
is only as reliable as the estimated rate of growth
which of the following statements related to the SML approach to equity valuation is correct? assume the firm uses debt in capital structure
the model is dependent upon a reliable estimate of the market risk premium
which of the following statements is correct? Test question
2,3,4 only
the pre tax cost of debt
is based on the current yield to maturity of the firms outstanding bonds
the aftertax cost of debt generally increases when
2,3 only
the cost of preferred stock is computed the same as
return on perpetuity
the cost of preferred stock
is equal to the dividend yield
the capital structure weights used in computing the weighted average cost of capital:
are based on the market value of the firms debt and equity securities
morris industries has a capital structure of 55 percent common stock, 10 preferred stock, and 45 percent debt
the firms cost of equity is unaffected by a change in the firms tax rate
the aftertax cost of debt
has a greater effect ton a firms cost of capital when the debt equity ratio increases
the weighted average cost of capital for a firm may be dependent upon the firms
1,2,3,4
the weighted average cost of capital for a firm is the
rate of return a firm must earn on its existing assets to maintain the current value of its stock
which one of the following statements is correct for a firm that uses debt in its capital structure?
the WACC should decrease as the firms debt to equity ratio increases
if a firm uses its WACC as the discount rate for all of the projects it undertakes, then:
1,2,3,4
preston industries has to seperate division
assign appropriate but differing discount rates to each project then select the projects with the highest net present values
marley and sterns is a multi divisional firm that uses its WACC as the discount rate for all proposed projects
prefer higher risk projects over lower risk projects
the discount rate assigned to an individual project should be based on:
the risks associated with the use of the funds required by the project
assigning discount rates to individual projects based on the risk level:
may cause a firms overall weighted average cost of capital to either increase or decrease over time
which of the following statements is correct?
a project that is unacceptable today might be acceptable tomorrow given a change in market returns
phil owns a sit down restaurant that specializes in home cooked meals
both phil and theresa
wilderness adventures specializes in back country and resort management
neither wilderness adventures or travel excitement
the subjective approach to project analysis
assigns discount rates to projects based on the discretion of senior managers
which of the following statements is correct?
overall, a firm makes better decisions when it uses the subjective approach than when it uses the WACC as the discount rate
when a firm has flotation costs equal to 7% of the funding needed, project analysts should:
increase the initial project cost by dividing that cost by 1-.07
the flotation cost for a firm is computed as
the weighted average of the flotation costs associated with each form of financing
incoroporating flotation costs into the analysis of a project will:
increase the initial cash outflow of the project
flotation costs for a leveraged firm should:
be weighted and included in the initial cash flow
Other sets by this creator