Managerial Finance: Chapter 12

Question 1 of 20

1

The cost of preferred stock:

Select one of the following:

increases when a firm's tax rate decreases.
is constant over time.
is unaffected by changes in the market price of the stock.
is equal to the stock's dividend yield.
increases as the price of the stock increases.

Explanation

Question 2 of 20

1

Which one of the following will decrease the aftertax cost of debt for a firm?

Select one of the following:

Decrease in the firm's beta
Increase in tax rates
Increase in the risk-free rate of return
Decrease in the market price of the debt
Increase in a bond's yield to maturity

Explanation

Question 3 of 20

1

A 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?

Select one of the following:

Assign every project a rate equal to the firm's cost of equity
Assign every investment a random rate that varies between the firm's cost of debt and its cost of equity
Assign every project a rate equal to the firm's WACC plus or minus a subjective adjustment
Determine the best pure play rate for each project
Assign every project a rate equal to the market rate of return at the time of the proposal

Explanation

Question 4 of 20

1

Which statement is true?

Select one of the following:

An increase in the market value of preferred stock will increase a firm's weighted average cost of capital.
The cost of preferred stock is unaffected by the issuer's tax rate.
Preferred stock is generally the cheapest source of capital for a firm.
The cost of preferred stock remains constant from year to year.
Preferred stock is valued using the capital asset pricing model.

Explanation

Question 5 of 20

1

Old 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:

Select one of the following:

require the highest rate of return from Division X since it has been in existence the longest.
assign the highest cost of capital to Division Z because it is most likely the riskiest of the three divisions.
use the firm's WACC as the cost of capital for Division Z as it provides analysis for the entire firm.
use 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.
allocate capital funds evenly amongst the divisions to maintain the current capital structure of the firm.

Explanation

Question 6 of 20

1

A firm that uses its weighted average cost of capital as the required return for all of its investments will:

Select one of the following:

maintain a constant value for its shareholders.
increase the risk level of the firm over time.
make the best possible accept and reject decisions related to those investments.
find that its cost of capital declines over time.
accept only the projects that add value to the firm's shareholders.

Explanation

Question 7 of 20

1

In an efficient market, the cost of equity for a highly risky firm:

Select one of the following:

will be less than the market rate but higher than the risk-free rate.
must equal the market rate of return.
changes by 1 percent for every 1 percent change in the risk-free rate.
decreases as the beta of the firm's stock increases.
increases in direct relation to the stock's systematic risk.

Explanation

Question 8 of 20

1

Boone 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?

Select one of the following:

Boone Brothers' cost of capital
Ace Builders' cost of capital
Average of Boone Brothers' and Ace Builders' cost of capital
Lower of Boone Brothers' or Ace Builders' cost of capital
Higher of Boone Brothers' or Ace Builders' cost of capital

Explanation

Question 9 of 20

1

Which one of the following statements is correct? Assume the pretax cost of debt is less than the cost of equity.

Select one of the following:

A firm may change its capital structure if the government changes its tax policies.
A decrease in the dividend growth rate increases the cost of equity.
A decrease in the systematic risk of a firm will increase the firm's cost of capital.
A decrease in a firm's debt-equity ratio will decrease the firm's cost of capital.
The cost of preferred stock decreases when the tax rate increases.

Explanation

Question 10 of 20

1

Which one of the following is used as the pretax cost of debt?

Select one of the following:

Average coupon rate on the firm's outstanding bonds
Coupon rate on the firm's latest bond issue
Weighted average yield to maturity on the firm's outstanding debt
Average current yield on the firm's outstanding debt
Annual interest divided by the market price per bond for the latest bond issue

Explanation

Question 11 of 20

1

Which one of the following is the primary determinant of an investment's cost of capital?

Select one of the following:

Life of the investment
Amount of the initial cash outlay
The investment’s level of risk
The source of funds used for the investment
The investment's net present value

Explanation

Question 12 of 20

1

All else constant, an increase in a firm's cost of debt:

Select one of the following:

could be caused by an increase in the firm's tax rate.
will result in an increase in the firm's cost of capital.
will lower the firm's weighted average cost of capital.
will lower the firm's cost of equity.
will increase the firm's capital structure weight of debt.

Explanation

Question 13 of 20

1

Which one of the following statements is correct related to the dividend growth model approach to computing the cost of equity?

Select one of the following:

The rate of growth must exceed the required rate of return.
The rate of return must be adjusted for taxes.
The annual dividend used in the computation must be for Year 1 if you are Time 0’s stock price to compute the return.
The cost of equity is equal to the return on the stock plus the risk-free rate.
The cost of equity is equal to the return on the stock multiplied by the stock's beta.

Explanation

Question 14 of 20

1

Kelly'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?

Select one of the following:

The current market rate of interest
Actual source of funds used to finance the project
The perceived risk level of project
The division within the firm that will be assigned to manage the project
The firm’s current debt-equity ratio

Explanation

Question 15 of 20

1

Kurt, 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?

Select one of the following:

Kurt tends to overestimate the projected cash inflows on his projects.
Kurt tends to underestimate the variable costs of his projects.
Kurt has the most efficiently managed division.
Kurt's division is less risky than the other divisions.
Kurt's projects are generally financed with debt while the other divisions' projects are financed with equity.

Explanation

Question 16 of 20

1

Black Stone Furnaces wants to build a new facility. The cost of capital for this investment is primarily dependent on which one of the following?

Select one of the following:

The firm's overall source of funds
Source of the funds used to build the facility
Current tax rate
The nature of the investment
Firm's historical average rate of return

Explanation

Question 17 of 20

1

Kate 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.

Select one of the following:

pure play
divisional rating
subjective
straight WACC
equity rating

Explanation

Question 18 of 20

1

Ted 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?

Select one of the following:

Amount of debt used to finance the project
Use, or lack, of preferred stock as a financing option
Mix of funds used to finance the project
Risk level of the project
Length of the project's life

Explanation

Question 19 of 20

1

Katie 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?

Select one of the following:

Weighted average cost of capital
Pure play cost
Cost of equity
Subjective cost
Cost of debt

Explanation

Question 20 of 20

1

Which 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?

Select one of the following:

Cost of equity
Pretax cost of debt
Aftertax cost of debt
Weighted average cost of capital
Weighted average cost of preferred and common stock

	Created by Parappu Adai almost 7 years ago