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Financial Management Test 3

Terms in this set (38)

The cost of equity obtained by retaining earnings is generally regarded as being the rate of return stock holders require on the firm's common stock.
True
According to our constant growth stock valuation model, which of the following will cause the price of a share of common stock to decrease?
An increase in the required rate of return on the stock
Which of the following statements is correct?
When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are tax-deductible.
Characteristics of the payback period method include
A. It is useful as a risk or liquidity indicator.
B. It directly and properly accounts for the time value of money.
C.It ignores cash flows beyond the payback period.
D. All of the above are characteristics of the payback method.
E. Only a and b
F. Only a and c
G. Only b and c
F. Only A and C
If the calculated NPV is POSITIVE, then which of the following must be true? The discount rate used is
Less than the internal rate of return
In order to accept a project in our capital budget, we require that:
NPV is greater than zero and IRR is greater than the cost of capital
When a manager accepts a project with a NEGATIVE NPV, she will most likely:
Decrease the value of the firm's shares of common stock.
The longer the life of a capital budgeting project, when compared to a shorter life project,
the more significant and risky is the discount rate decision
Which of the following is not considered a capital component for the purpose of calculating the weighted average cost of capital as it applies to capital budgeting?
Fixed assets
For a profitable firm paying 10% for new debt, an increase in the firm's tax rate will
decrease its after-tax cost of debt
Which of the following statements are true?
A. The WACC measures the firm's after-tax cost of capital
B. The WACC calculation includes the cost of short-term debt, like accounts payable
C. The WACC measures the marginal cost of capital, and is used as the discount rate for capital budgeting
D. All of the above statements are correct
E. Statements A and B are correct
F. Statements A and C are correct
G. Statements B and C are correct
F
For a typical firm, which of the following is correct? All rates are after taxes, and assume the firm operates at its target capital structure, using new common(e), retained earnings(s) and long-term debt (d), where r indicates rate
Re>_WACC>_Rd.
You wish to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant growth DDM, the intrinsic value of stock A
will be higher than the present value of stock B
When evaluating potential projects, which of the following factors should be incorporated as part of a project's estimated cash flow?
A. Any sunk costs that were incurred in the past prior to considering the proposed project
B. Any opportunity costs that incurred if the project is undertaken.
C. Any externalities (both positive and negative) that are incurred if the project is undertaken.
D. All of the statements above are correct.
E. Statements A and B are correct
F. Statements B and C are correct.
G. Statements A and C are correct.
F
As shown in class, which stock has the lowest beta?
Westar Energy
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