Quiz
Managerial Finance: Chapter 12
Fragen in diesem Quiz (20)
1The cost of preferred stock:
- Aincreases when a firm's tax rate decreases.
- Bis constant over time.
- Cis unaffected by changes in the market price of the stock.
- Dis equal to the stock's dividend yield.
- Eincreases as the price of the stock increases.
2Which one of the following will decrease the aftertax cost of debt for a firm?
- ADecrease in the firm's beta
- BIncrease in tax rates
- CIncrease in the risk-free rate of return
- DDecrease in the market price of the debt
- EIncrease in a bond's yield to maturity
3A firm has multiple divisions of similar nature, yet varying degrees of risk. Which one of the following would be the most appropriate, yet relatively easy, means of assigning discount rates to each of its numerous proposed investments?
- AAssign every project a rate equal to the firm's cost of equity
- BAssign every investment a random rate that varies between the firm's cost of debt and its cost of equity
- CAssign every project a rate equal to the firm's WACC plus or minus a subjective adjustment
- DDetermine the best pure play rate for each project
- EAssign every project a rate equal to the market rate of return at the time of the proposal
4Which statement is true?
- AAn increase in the market value of preferred stock will increase a firm's weighted average cost of capital.
- BThe cost of preferred stock is unaffected by the issuer's tax rate.
- CPreferred stock is generally the cheapest source of capital for a firm.
- DThe cost of preferred stock remains constant from year to year.
- EPreferred stock is valued using the capital asset pricing model.
5Old Town Industries has three divisions. Division X has been in existence the longest and has the most stable sales. Division Y has been in existence for five years and is slightly less risky than the overall firm. Division Z is the research and development side of the business. Given this, the firm should probably:
- Arequire the highest rate of return from Division X since it has been in existence the longest.
- Bassign the highest cost of capital to Division Z because it is most likely the riskiest of the three divisions.
- Cuse the firm's WACC as the cost of capital for Division Z as it provides analysis for the entire firm.
- Duse the firm's WACC as the cost of capital for Divisions A and B because they are part of the revenue-producing operations of the firm.
- Eallocate capital funds evenly amongst the divisions to maintain the current capital structure of the firm.
6A firm that uses its weighted average cost of capital as the required return for all of its investments will:
- Amaintain a constant value for its shareholders.
- Bincrease the risk level of the firm over time.
- Cmake the best possible accept and reject decisions related to those investments.
- Dfind that its cost of capital declines over time.
- Eaccept only the projects that add value to the firm's shareholders.
7In an efficient market, the cost of equity for a highly risky firm:
- Awill be less than the market rate but higher than the risk-free rate.
- Bmust equal the market rate of return.
- Cchanges by 1 percent for every 1 percent change in the risk-free rate.
- Ddecreases as the beta of the firm's stock increases.
- Eincreases in direct relation to the stock's systematic risk.
8Boone Brothers remodels homes and replaces windows. Ace Builders constructs new homes. If Boone Brothers considers expanding into new home construction, it should evaluate the expansion project using which one of the following as the required return for the project?
- ABoone Brothers' cost of capital
- BAce Builders' cost of capital
- CAverage of Boone Brothers' and Ace Builders' cost of capital
- DLower of Boone Brothers' or Ace Builders' cost of capital
- EHigher of Boone Brothers' or Ace Builders' cost of capital
9Which one of the following statements is correct? Assume the pretax cost of debt is less than the cost of equity.
- AA firm may change its capital structure if the government changes its tax policies.
- BA decrease in the dividend growth rate increases the cost of equity.
- CA decrease in the systematic risk of a firm will increase the firm's cost of capital.
- DA decrease in a firm's debt-equity ratio will decrease the firm's cost of capital.
- EThe cost of preferred stock decreases when the tax rate increases.
10Which one of the following is used as the pretax cost of debt?
- AAverage coupon rate on the firm's outstanding bonds
- BCoupon rate on the firm's latest bond issue
- CWeighted average yield to maturity on the firm's outstanding debt
- DAverage current yield on the firm's outstanding debt
- EAnnual interest divided by the market price per bond for the latest bond issue
11Which one of the following is the primary determinant of an investment's cost of capital?
- ALife of the investment
- BAmount of the initial cash outlay
- CThe investment’s level of risk
- DThe source of funds used for the investment
- EThe investment's net present value
12All else constant, an increase in a firm's cost of debt:
- Acould be caused by an increase in the firm's tax rate.
- Bwill result in an increase in the firm's cost of capital.
- Cwill lower the firm's weighted average cost of capital.
- Dwill lower the firm's cost of equity.
- Ewill increase the firm's capital structure weight of debt.
13Which one of the following statements is correct related to the dividend growth model approach to computing the cost of equity?
- AThe rate of growth must exceed the required rate of return.
- BThe rate of return must be adjusted for taxes.
- CThe annual dividend used in the computation must be for Year 1 if you are Time 0’s stock price to compute the return.
- DThe cost of equity is equal to the return on the stock plus the risk-free rate.
- EThe cost of equity is equal to the return on the stock multiplied by the stock's beta.
14Kelly's uses the firm's WACC as the required return for some of its projects. For other projects, the firms uses a rate equal to WACC plus one percent, while another set of projects is assigned rates equal to WACC minus some amount. Which one of the following factors should be the key factor the firm uses to determine the amount of the adjustment it will make when assigning a discount rate to a specific project?
- AThe current market rate of interest
- BActual source of funds used to finance the project
- CThe perceived risk level of project
- DThe division within the firm that will be assigned to manage the project
- EThe firm’s current debt-equity ratio
15Kurt, who is a divisional manager, continually brags that his division's required return for its projects is one percent lower than the return required for any other division of the firm. Which one of the following most likely contributes the most to the lower rate requirement for Kurt's division?
- AKurt tends to overestimate the projected cash inflows on his projects.
- BKurt tends to underestimate the variable costs of his projects.
- CKurt has the most efficiently managed division.
- DKurt's division is less risky than the other divisions.
- EKurt's projects are generally financed with debt while the other divisions' projects are financed with equity.
16Black Stone Furnaces wants to build a new facility. The cost of capital for this investment is primarily dependent on which one of the following?
- AThe firm's overall source of funds
- BSource of the funds used to build the facility
- CCurrent tax rate
- DThe nature of the investment
- EFirm's historical average rate of return
17Kate is the CFO of a major firm and has the job of assigning discount rates to each project under consideration. Kate's method of doing this is to assign an incrementally higher rate as the risk level of the project increases and a lower rate as the risk level declines. Kate is applying the ___ approach.
- Apure play
- Bdivisional rating
- Csubjective
- Dstraight WACC
- Eequity rating
18Ted is trying to decide what cost of capital he should assign to a project. Which one of the following should be his primary consideration in this decision?
- AAmount of debt used to finance the project
- BUse, or lack, of preferred stock as a financing option
- CMix of funds used to finance the project
- DRisk level of the project
- ELength of the project's life
19Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC?
- AWeighted average cost of capital
- BPure play cost
- CCost of equity
- DSubjective cost
- ECost of debt
20Which one of the following represents the minimum rate of return a firm must earn on its assets if it is to maintain the current value of its securities?
- ACost of equity
- BPretax cost of debt
- CAftertax cost of debt
- DWeighted average cost of capital
- EWeighted average cost of preferred and common stock
Informationen
- Beschreibung
- Managerial Finance: Chapter 12
- Autor
- Parappu Adai
- Sprache
- English
- Aufrufe
- 153
- Schlagwörter
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