chap 13 FIN303 – Flashcards
22 test answers
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The beta for a firm can be estimated by A) adding up the betas of the individual projects of the firm. B) taking the weighted average of the beta for the individual projects of the firm. C) taking the simple average of the beta for the individual projects of the firm. D) None of the above.
answer
b
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The firm can be viewed as A) a portfolio of individual projects, each with their own risks, cost of capital, and returns. B) a collection of equity shares comprising it. C) a collection of debt instruments financing it. D) none of the above.
answer
a
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In order for a firm to estimate its cost of debt capital by observing the price of its debt instruments, A) the firm must depend on markets being reasonably efficient. B) the debt must be privately held. C) the beta of the debt must be greater than the beta of the firm's equity. D) None of the above.
answer
a
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If markets are not reasonably efficient, then A) the estimates of expected returns are not needed. B) the need for a discount rate to analyze project cash flows is not needed. C) estimates of expected returns that were based on security prices will not be reliable. D) none of the above.
answer
c
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When estimating the cost of debt capital for the firm, we are primarily interested in A) the cost of short-term debt. B) the cost of long-term debt. C) the coupon rate of the debt. D) none of the above.
answer
b
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Long-term debt typically describes A) debt with a maturity greater than one year. B) only coupon debt. C) publicly traded debt. D) none of the above.
answer
a
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Which of the following need to be excluded from the calculation of the firm's amount of permanent debt? A) Long-term debt B) Revolving lines of credit C) Mortgage debt D) None of the above
answer
b
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When analyzing a firm's cost of debt, we are typically interested in A) the cost of the debt on the date that the analysis is being completed. B) the coupon rate on the firm's bonds. C) the risk-free rate plus half a percent. D) none of the above.
answer
a
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If a firm has bonds outstanding and the firm would like to calculate the current cost of debt for the bonds, then the firm would A) use the coupon rate of the bonds to estimate the cost. B) use the current yield to maturity of the bonds to estimate the cost. C) use the current coupon yield of the bonds to estimate the cost. D) none of the above.
answer
b
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A bond has a coupon rate of 6 percent and the bond makes semiannual coupon payments. The dollar amount of coupon interest received every six months is A) $60. B) $30. C) $30 plus or minus the prorate portion of the discount or premium that the bond was purchased for. D) none of the above.
answer
b
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Bond issuance costs include A) investment banking fees. B) legal fees. C) accountant fees. D) all of the above.
answer
d
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Income taxes have the effect of A) increasing the cost of debt. B) decreasing the cost of debt. C) decreasing the cost of capital for the firm. D) both b and c are correct.
answer
b
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he appropriate risk-free rate to use when calculating the cost of equity for a firm is A) a long-term Treasury rate. B) a short-term Treasury rate. C) a 50/50 mix of short-term and long-term Treasury rates. D) none of the above.
answer
a
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The average risk-premium for the market from 1926 to 2009 was A) 8.00%. B) 7.50%. C) 6.01%. D) 6.51% + the Treasury rate.
answer
c
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The recommended model to estimate the cost of common equity for a firm is A) a one-stage constant growth model. B) a multistage growth model. C) the CAPM. D) none of the above.
answer
c
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In order to use the WACC to evaluate a future project's flows, which of the following must hold? A) The project will be financed with the same proportion of debt and equity as the firm. B) The systematic risk of the project is the same as the overall systematic risk of the firm. C) The project must be viable. D) a and b above.
answer
d
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Which type of project do financial managers typically use the highest cost of capital when evaluating? Extension projects New product projects Efficiency projects Market expansion projects
answer
b
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If a company's weighted average cost of capital is less than the required return on equity, then the firm: A) Is financed with more than 50% debt. B) Is perceived to be safe C) Has debt in its capital structure D) Must have preferred stock in its capital structure
answer
c
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