Question 1

Which one of these will produce an acceptable estimate of the value of the market risk premium?

Accepted Answer

A) Historical rate of return on a market index 
B) Average rate of return on the S&P 500 plus the risk-free rate 
C) Dividend yield of the S&P 500 + Consensus forecast of future dividend growth - U.S.Treasury bill rate 
D) Total dividends paid by the S&P 500 firms for a 1-year period divided by the U.S.Treasury bill rate 
E) Rate computed using the CAPM and a beta of 1 
A) Historical rate of return on a market index 
B) Average rate of return on the S&P 500 plus the risk-free rate 
C) Dividend yield of the S&P 500 + Consensus forecast of future dividend growth - U.S.Treasury bill rate 
D) Total dividends paid by the S&P 500 firms for a 1-year period divided by the U.S.Treasury bill rate 
E) Rate computed using the CAPM and a beta of 1 C

Question 2

The weights used in the computation of a project's flotation costs should be based on the

Accepted Answer

A) market values of the company's outstanding debt and equity. 
B) current book value of the company's debt and equity. 
C) company's historical debt-to-equity ratio. 
D) the company's target debt-to-equity ratio. 
E) project's actual sources of funding. 
A) market values of the company's outstanding debt and equity. 
B) current book value of the company's debt and equity. 
C) company's historical debt-to-equity ratio. 
D) the company's target debt-to-equity ratio. 
E) project's actual sources of funding. D

Question 3

The Lumber Shack just paid an annual dividend of $1.23 a share.The dividend growth rate is 4 percent,the tax rate is 34 percent,and the common stock sells for $38 a share.What is the cost of equity?

Accepted Answer

A) 7)24% 
B) 7)09% 
C) 7)18% 
D) 7)37% 
E) 7)32% 
A) 7)24% 
B) 7)09% 
C) 7)18% 
D) 7)37% 
E) 7)32% D

Question 4

Why is an accurate WACC so important when evaluating a new project? Assume a negative cash outflow at Time 0 and positive project cash flows thereafter.

Accepted Answer

A) The coupon rate on new bonds issued to fund the project will be set equal to WACC. 
B) The project's WACC will replace the firm's WACC as the discount rate for all future projects. 
C) The project's accept/reject decision will be based on the NPV calculated using that WACC. 
D) The return to shareholders will be limited by the WACC. 
E) The firm can only maintain or increase its current value if the project WACC exceeds the project's internal rate of return. 
A) The coupon rate on new bonds issued to fund the project will be set equal to WACC. 
B) The project's WACC will replace the firm's WACC as the discount rate for all future projects. 
C) The project's accept/reject decision will be based on the NPV calculated using that WACC. 
D) The return to shareholders will be limited by the WACC. 
E) The firm can only maintain or increase its current value if the project WACC exceeds the project's internal rate of return.

Question 5

Companies A and B are identical except for their capital structures.Company A is an all-equity company while Company B is levered.Given this,you can assume that Company B's equity beta is ________ Company A's beta and its debt beta is assumed to be ________.

Accepted Answer

A) greater than;equal to zero 
B) greater than;equal to one 
C) equal to;equal to the market beta 
D) less than: equal to zero 
E) less than;equal to one 
A) greater than;equal to zero 
B) greater than;equal to one 
C) equal to;equal to the market beta 
D) less than: equal to zero 
E) less than;equal to one

Question 6

Assume the S&P 500 has a dividend yield of 3.2 percent.Analysts expect overall dividends to grow at 5.4 percent annually.Treasury bills yield 2.1 percent.The expected market rate of return is ________ percent,and the market risk premium is ________ percent.

Accepted Answer

A) 10.7;1.1 
B) 10.7;6.5 
C) 8)6;6.5 
D) 8)6;1.1 
E) 5)3;1.1 
A) 10.7;1.1 
B) 10.7;6.5 
C) 8)6;6.5 
D) 8)6;1.1 
E) 5)3;1.1

Question 7

Taylor's has a beta of 0.97 and a debt-to-equity ratio of 0.46.The market rate of return is 11.3 percent,the tax rate is 34 percent,and the risk-free rate is 2.2 percent.The pretax cost of debt is 6.4 percent.What is the firm's WACC?

Accepted Answer

A) 8)39% 
B) 7)67% 
C) 8)16% 
D) 9)46% 
E) 8)88% 
A) 8)39% 
B) 7)67% 
C) 8)16% 
D) 9)46% 
E) 8)88%

Question 8

Assume a company's cost of equity exceeds its pretax cost of debt.Given this assumption and assuming all else is held constant,the company's WACC must increase if the

Accepted Answer

A) tax rate decreases. 
B) company's beta decreases. 
C) pretax cost of debt decreases. 
D) debt-to-equity ratio decreases. 
E) market risk premium decreases. 
A) tax rate decreases. 
B) company's beta decreases. 
C) pretax cost of debt decreases. 
D) debt-to-equity ratio decreases. 
E) market risk premium decreases.

Question 9

The cost of preferred stock

Accepted Answer

A) increases as the beta of the firm increases. 
B) is equal to the annual dividend divided by the par value of the stock. 
C) is equal to the annual dividend divided by the present value of all the future dividend payments. 
D) varies as tax rates vary. 
E) is generally computed using the CAPM. 
A) increases as the beta of the firm increases. 
B) is equal to the annual dividend divided by the par value of the stock. 
C) is equal to the annual dividend divided by the present value of all the future dividend payments. 
D) varies as tax rates vary. 
E) is generally computed using the CAPM.

Question 10

Green Roof Foods currently has a debt-to-equity ratio of 0.53,its cost of equity is 14.2 percent,and its pretax cost of debt is 6.8 percent.The tax rate is 35 percent,and the risk-free rate is 3.1 percent.The firm's preferred capital structure consists of 35 percent debt.What discount rate should be assigned to a new project the firm is considering if the project is equally as risky as the overall firm and will be financed solely with equity?

Accepted Answer

A) 10.03% 
B) 9)76% 
C) 11.07% 
D) 10.78% 
E) 10.26% 
A) 10.03% 
B) 9)76% 
C) 11.07% 
D) 10.78% 
E) 10.26%

Question 11

To calculate beta,you divide the ________ of the stock with the market portfolio by the ________ of the market portfolio.

Accepted Answer

A) covariance;variance 
B) variance;covariance 
C) standard deviation;variance 
D) expected return;variance 
E) covariance;standard deviation 
A) covariance;variance 
B) variance;covariance 
C) standard deviation;variance 
D) expected return;variance 
E) covariance;standard deviation

Question 12

In project analysis,flotation costs are generally

Accepted Answer

A) included as a final cost of the project. 
B) included in the cost of capital. 
C) treated as an additional tax. 
D) treated as a cost of debt. 
E) included in the amount raised. 
A) included as a final cost of the project. 
B) included in the cost of capital. 
C) treated as an additional tax. 
D) treated as a cost of debt. 
E) included in the amount raised.

Question 13

An all-equity firm has a beta of 0.94.Assume the beta of debt is equal to the risk-free beta.If the firm changes to a debt-equity ratio of 0.35,its equity beta would be ________,and if it changes its debt-equity ratio to 0.40,its equity beta would be ________.

Accepted Answer

A) 1)269;1.316 
B) 1)269;1.234 
C) 1)190;1.234 
D) 1)190;1.316 
E) 1)234;1.316 
A) 1)269;1.316 
B) 1)269;1.234 
C) 1)190;1.234 
D) 1)190;1.316 
E) 1)234;1.316

Question 14

Leo's Cars has a beta of 1.1 and its RWACC is 13.6 percent.The market risk premium is 7.2 percent,and the risk-free rate is 2.3 percent.The firm's cash flow at Time 4 is $28,800 with a growth rate of 2.1 percent.What is the value of the firm at Time 4?

Accepted Answer

A) $273,584.91 
B) $255,693.91 
C) $251,004.16 
D) $247,399.38 
E) $260,729.20 
A) $273,584.91 
B) $255,693.91 
C) $251,004.16 
D) $247,399.38 
E) $260,729.20

Question 15

An all-equity firm has a beta of 1.03.The firm is evaluating a project that will increase the output of the firm's existing products.The market risk premium is 6.9 percent,and the risk-free rate is 3.4 percent.What discount rate should be assigned to this expansion project?

Accepted Answer

A) 8)39% 
B) 7)22% 
C) 7)15% 
D) 10.51% 
E) 11.37% 
A) 8)39% 
B) 7)22% 
C) 7)15% 
D) 10.51% 
E) 11.37%

Question 16

Which one of these statements is correct?

Accepted Answer

A) The asset beta will equal the equity beta for a levered firm. 
B) Leverage increases the asset beta. 
C) A portfolio beta is the summation of the betas of each of the individual securities held in the portfolio. 
D) The equity beta refers to the beta of an all-equity firm. 
E) Financial leverage refers to a firm's use of debt and its related fixed costs of finance. 
A) The asset beta will equal the equity beta for a levered firm. 
B) Leverage increases the asset beta. 
C) A portfolio beta is the summation of the betas of each of the individual securities held in the portfolio. 
D) The equity beta refers to the beta of an all-equity firm. 
E) Financial leverage refers to a firm's use of debt and its related fixed costs of finance.

Question 17

The cost of equity for Ryan Corporation is 17 percent.The expected return on the market is 12.94 percent,the risk-free rate is 3.5 percent,and the tax rate is 34 percent.What is the company's equity beta?

Accepted Answer

A) 0)97 
B) 1)62 
C) 1)18 
D) 1)07 
E) 1)43 
A) 0)97 
B) 1)62 
C) 1)18 
D) 1)07 
E) 1)43

Question 18

Jeanette's Medical Supply has a beta of 1.47 and its RWACC is 11.8 percent.The market risk premium is 7.4 percent,and the risk-free rate is 3.6 percent.The firm's cash flow at Time 3 is $73,900 with a growth rate of 2.2 percent.What is the terminal value of the firm at Time 3?

Accepted Answer

A) $748,056.60 
B) $786,727.08 
C) $667,229.73 
D) $844,329.90 
E) $649,688.15 
A) $748,056.60 
B) $786,727.08 
C) $667,229.73 
D) $844,329.90 
E) $649,688.15

Question 19

How does the valuation of a company vary from the valuation of a project using WACC?

Accepted Answer

A) Book values are used as the weights for WACC when valuing a company. 
B) Debt and equity weights are set equal for WACC when valuing a company. 
C) A terminal value is included in the valuation process for a company but generally not for a project. 
D) Debt is not adjusted for taxes when computing the WACC for a company valuation. 
E) The WACC must be set equal to RM when valuing a company. 
A) Book values are used as the weights for WACC when valuing a company. 
B) Debt and equity weights are set equal for WACC when valuing a company. 
C) A terminal value is included in the valuation process for a company but generally not for a project. 
D) Debt is not adjusted for taxes when computing the WACC for a company valuation. 
E) The WACC must be set equal to RM when valuing a company.

Question 20

The discount rate for a project should equal the

Accepted Answer

A) cost of equity of the firm. 
B) expected return on a financial asset of comparable risk. 
C) discount rate used on the firm's last profitable project. 
D) firm's weighted average cost of capital. 
E) market rate of return. 
A) cost of equity of the firm. 
B) expected return on a financial asset of comparable risk. 
C) discount rate used on the firm's last profitable project. 
D) firm's weighted average cost of capital. 
E) market rate of return.

Which one of these will produce an acceptable estimate of the value of the market risk premium?

The weights used in the computation of a project's flotation costs should be based on the

The Lumber Shack just paid an annual dividend of $1.23 a share.The dividend growth rate is 4 percent,the tax rate is 34 percent,and the common stock sells for $38 a share.What is the cost of equity?

Why is an accurate WACC so important when evaluating a new project? Assume a negative cash outflow at Time 0 and positive project cash flows thereafter.

Companies A and B are identical except for their capital structures.Company A is an all-equity company while Company B is levered.Given this,you can assume that Company B's equity beta is Company A's beta and its debt beta is assumed to be .

Assume the S&P 500 has a dividend yield of 3.2 percent.Analysts expect overall dividends to grow at 5.4 percent annually.Treasury bills yield 2.1 percent.The expected market rate of return is percent,and the market risk premium is percent.

Taylor's has a beta of 0.97 and a debt-to-equity ratio of 0.46.The market rate of return is 11.3 percent,the tax rate is 34 percent,and the risk-free rate is 2.2 percent.The pretax cost of debt is 6.4 percent.What is the firm's WACC?

Assume a company's cost of equity exceeds its pretax cost of debt.Given this assumption and assuming all else is held constant,the company's WACC must increase if the

The cost of preferred stock

To calculate beta,you divide the of the stock with the market portfolio by the of the market portfolio.

In project analysis,flotation costs are generally

An all-equity firm has a beta of 0.94.Assume the beta of debt is equal to the risk-free beta.If the firm changes to a debt-equity ratio of 0.35,its equity beta would be ,and if it changes its debt-equity ratio to 0.40,its equity beta would be .

Leo's Cars has a beta of 1.1 and its R_WACC is 13.6 percent.The market risk premium is 7.2 percent,and the risk-free rate is 2.3 percent.The firm's cash flow at Time 4 is $28,800 with a growth rate of 2.1 percent.What is the value of the firm at Time 4?

An all-equity firm has a beta of 1.03.The firm is evaluating a project that will increase the output of the firm's existing products.The market risk premium is 6.9 percent,and the risk-free rate is 3.4 percent.What discount rate should be assigned to this expansion project?

Which one of these statements is correct?

The cost of equity for Ryan Corporation is 17 percent.The expected return on the market is 12.94 percent,the risk-free rate is 3.5 percent,and the tax rate is 34 percent.What is the company's equity beta?

Jeanette's Medical Supply has a beta of 1.47 and its R_WACC is 11.8 percent.The market risk premium is 7.4 percent,and the risk-free rate is 3.6 percent.The firm's cash flow at Time 3 is $73,900 with a growth rate of 2.2 percent.What is the terminal value of the firm at Time 3?

How does the valuation of a company vary from the valuation of a project using WACC?

The discount rate for a project should equal the

Introduction to Corporate Finance

Financial Statements AMCQ Cash Flow

Financial Statements Analysis Amcq Financial Models

Discounted Cash Flow Valuation

Interest Rates AMCQ Bomcq Valuation

Stock Valuation

Net Present Value AMCQ Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, AMCQ Capital Budgeting

Risk Amcq Return: Lessons From Market History

Return Amcq Risk: the Capital Asset Pricing Model Capm

Efficient Capital Markets Amcq Behavioral Challenges

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividemcqs AMCQ Other Payouts

Options Amcq Corporate Finance

Short-Term Finance Amcq Planning

Raising Capital

International Corporate Finance

Mergers Amcq Acquisitions Web Only

Filters

Exam 12: Risk, cost of Capital, AMCQ Valuation

Which one of these will produce an acceptable estimate of the value of the market risk premium?

The weights used in the computation of a project's flotation costs should be based on the

The Lumber Shack just paid an annual dividend of $1.23 a share.The dividend growth rate is 4 percent,the tax rate is 34 percent,and the common stock sells for $38 a share.What is the cost of equity?

Why is an accurate WACC so important when evaluating a new project? Assume a negative cash outflow at Time 0 and positive project cash flows thereafter.

Companies A and B are identical except for their capital structures.Company A is an all-equity company while Company B is levered.Given this,you can assume that Company B's equity beta is ________ Company A's beta and its debt beta is assumed to be ________.

Assume the S&P 500 has a dividend yield of 3.2 percent.Analysts expect overall dividends to grow at 5.4 percent annually.Treasury bills yield 2.1 percent.The expected market rate of return is ________ percent,and the market risk premium is ________ percent.

Taylor's has a beta of 0.97 and a debt-to-equity ratio of 0.46.The market rate of return is 11.3 percent,the tax rate is 34 percent,and the risk-free rate is 2.2 percent.The pretax cost of debt is 6.4 percent.What is the firm's WACC?

Assume a company's cost of equity exceeds its pretax cost of debt.Given this assumption and assuming all else is held constant,the company's WACC must increase if the

The cost of preferred stock

To calculate beta,you divide the ________ of the stock with the market portfolio by the ________ of the market portfolio.

In project analysis,flotation costs are generally

An all-equity firm has a beta of 0.94.Assume the beta of debt is equal to the risk-free beta.If the firm changes to a debt-equity ratio of 0.35,its equity beta would be ________,and if it changes its debt-equity ratio to 0.40,its equity beta would be ________.

Leo's Cars has a beta of 1.1 and its RWACC is 13.6 percent.The market risk premium is 7.2 percent,and the risk-free rate is 2.3 percent.The firm's cash flow at Time 4 is $28,800 with a growth rate of 2.1 percent.What is the value of the firm at Time 4?

An all-equity firm has a beta of 1.03.The firm is evaluating a project that will increase the output of the firm's existing products.The market risk premium is 6.9 percent,and the risk-free rate is 3.4 percent.What discount rate should be assigned to this expansion project?

Which one of these statements is correct?

The cost of equity for Ryan Corporation is 17 percent.The expected return on the market is 12.94 percent,the risk-free rate is 3.5 percent,and the tax rate is 34 percent.What is the company's equity beta?

Jeanette's Medical Supply has a beta of 1.47 and its RWACC is 11.8 percent.The market risk premium is 7.4 percent,and the risk-free rate is 3.6 percent.The firm's cash flow at Time 3 is $73,900 with a growth rate of 2.2 percent.What is the terminal value of the firm at Time 3?

How does the valuation of a company vary from the valuation of a project using WACC?

The discount rate for a project should equal the

Introduction to Corporate Finance

Financial Statements AMCQ Cash Flow

Financial Statements Analysis Amcq Financial Models

Discounted Cash Flow Valuation

Interest Rates AMCQ Bomcq Valuation

Stock Valuation

Net Present Value AMCQ Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, AMCQ Capital Budgeting

Risk Amcq Return: Lessons From Market History

Return Amcq Risk: the Capital Asset Pricing Model Capm

Efficient Capital Markets Amcq Behavioral Challenges

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividemcqs AMCQ Other Payouts

Options Amcq Corporate Finance

Short-Term Finance Amcq Planning

Raising Capital

International Corporate Finance

Mergers Amcq Acquisitions Web Only

Filters

Companies A and B are identical except for their capital structures.Company A is an all-equity company while Company B is levered.Given this,you can assume that Company B's equity beta is Company A's beta and its debt beta is assumed to be .

Assume the S&P 500 has a dividend yield of 3.2 percent.Analysts expect overall dividends to grow at 5.4 percent annually.Treasury bills yield 2.1 percent.The expected market rate of return is percent,and the market risk premium is percent.

To calculate beta,you divide the of the stock with the market portfolio by the of the market portfolio.

An all-equity firm has a beta of 0.94.Assume the beta of debt is equal to the risk-free beta.If the firm changes to a debt-equity ratio of 0.35,its equity beta would be ,and if it changes its debt-equity ratio to 0.40,its equity beta would be .

Leo's Cars has a beta of 1.1 and its R_WACC is 13.6 percent.The market risk premium is 7.2 percent,and the risk-free rate is 2.3 percent.The firm's cash flow at Time 4 is $28,800 with a growth rate of 2.1 percent.What is the value of the firm at Time 4?

Jeanette's Medical Supply has a beta of 1.47 and its R_WACC is 11.8 percent.The market risk premium is 7.4 percent,and the risk-free rate is 3.6 percent.The firm's cash flow at Time 3 is $73,900 with a growth rate of 2.2 percent.What is the terminal value of the firm at Time 3?