Calculating The Cost Of Capital
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- Introduction to Financial ManagementReviewing Financial StatementsAnalyzing Financial StatementsTime Value of Money 1: Analyzing Single Cash FlowsTime Value of Money 2: Analyzing Annuity Cash FlowsUnderstanding Financial Markets and InstitutionsValuing BondsValuing StocksCharacterizing Risk and ReturnEstimating Risk and ReturnCalculating the Cost of CapitalEstimating Cash Flows on Capital Budgeting ProjectsWeighing Net Present Value and Other Capital Budgeting CriteriaWorking Capital Management and PoliciesFinancial Planning and ForecastingAssessing Long-Term Debt, Equity, and Capital StructureSharing Firm Wealth: Dividends, Share Repurchases, and Other PayoutsIssuing Capital and the Investment Banking ProcessInternational Corporate FinanceMergers and Acquisitions and Financial Distress
Question 1
Free
Multiple Choice
When calculating the weighted average cost of capital, weights are based on
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book values.
book weights.
market values.
market betas.
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Question 2
Free
Multiple Choice
Which of these completes this statement to make it true? The constant growth model is
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always going to have assumptions that will hold true.
adjustable for stocks that don't expect constant growth without sizeable errors.
only going to be appropriate for the limited number of stocks that just happen to expect constant growth.
only going to be appropriate for the limited number of stocks that just happen to expect nonconstant growth.
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Question 3
Free
Multiple Choice
When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm's cash flows as
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a simple average of the capital components costs.
a sum of the capital components costs.
a weighted average of the capital components costs.
they apply to each asset as they are purchased with their respective forms of debt or equity.
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Question 4
Free
Multiple Choice
Which of the following is a true statement?
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To estimate the before-tax cost of debt, we need to solve for the Yield to Maturity (YTM) on the firm's existing debt.
To estimate the before-tax cost of debt, we need to solve for the Yield to Call (YTC) on the firm's existing debt.
To estimate the before-tax cost of debt, we use the coupon rate on the firm's existing debt.
To estimate the before-tax cost of debt, we use the average rate on the firm's existing debt.
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Question 5
Free
Multiple Choice
Which of the following is a true statement regarding the appropriate tax rate to be used in the WACC?
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One would use the marginal tax rate that the firm paid the prior year.
One would use the average tax rate that the firm paid the prior year.
One would use the weighted average of the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction.
One would use the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction.
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Question 6
Multiple Choice
Which of these statements is true regarding calculating weights for WACC?
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If we are calculating WACC for the firm, then equity, preferred stock and debt would be the entire book value of each source of capital.
If we are calculating WACC for the firm, then equity, preferred stock and debt would be the entire market value of each source of capital.
If we are calculating WACC for a project, then equity, preferred stock and debt would be the entire book value of each source of capital.
If we are calculating WACC for a project, then equity, preferred stock and debt would be the entire market value of each source of capital.
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Question 7
Multiple Choice
Which of the following statements is true?
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If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital.
If the new project is riskier than the firm's existing projects, then it should be charged a lower cost of capital.
If the new project is riskier than the firm's existing projects, then it should be charged the firm's cost of capital.
The new project's risk is not a factor in determining its cost of capital.
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Question 8
Multiple Choice
Which of the following makes this a true statement? If the new project does significantly increase the firm's overall risk
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the increased risk will be borne equally amongst the bondholders, preferred stockholders, and common stockholders.
the increased risk will be borne disproportionately by bondholders.
the increased risk will be borne disproportionately by preferred stockholders.
the increased risk will be borne disproportionately by common stockholders.
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Question 9
Multiple Choice
An average of which of the following will give a fairly accurate estimate of what a project's beta will be?
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flotation beta
proxy beta
pure-play proxies
weighted average beta
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Question 10
Multiple Choice
Which of the following makes this a true statement? Ideally, when searching for a beta for a new line of business
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one could find other firms engaged in the proposed new line of business and use their betas as proxies to estimate the project's risk.
one would like to find at least three or four pure-play proxies.
two (or even one) proxies might represent a suitable sample if their line of business resembles the proposed new project closely enough.
All of these choices are correct.
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Question 11
Multiple Choice
Which of these is an estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division?
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average WACC
divisional WACC
proxy WACC
pure-play WACC
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Question 12
Multiple Choice
Which of these statements is true regarding divisional WACC?
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Using a divisional WACC versus a WACC for the firm's current operations will result in quite a few incorrect decisions.
Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present more risk than the firm's average beta.
Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present less risk than the firm's average beta.
Using a firmwide WACC to evaluate new projects would have no impact on projects that present less risk than the firm's average beta.
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Question 13
Multiple Choice
An objective approach to calculating divisional WACCs would be done by
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simply considering the project's risk relative to the firm's lines of business and adjusting upward or downward to account for subjective opinions of project risk.
computing the average beta for the firm, the firm's CAPM formula, and the firm's WACC.
computing the average beta per division, using these figures for each division in the CAPM formula, and then constructing divisional WACCs.
simply averaging out all the WACCs for all the firm's projects.
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Question 14
Multiple Choice
Which statement makes this a false statement? When a firm pays commissions to underwriting firms that float the issuance of new stock
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the component cost will need to be integrated to figure project WACCs.
the component cost will need to be integrated only for the firm's WACC.
the firm can increase the project's WACC to incorporate the flotation costs' impact.
the firm can leave the WACC alone and adjust the project's initial investment upwards.
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Question 15
Multiple Choice
Which of the following is a principle of capital budgeting which states that the calculations of cash flows should remain independent of financing?
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generally accepted accounting principle
financing principle
separation principle
WACC principle
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Question 16
Multiple Choice
When we adjust the WACC to reflect flotation costs, this approach
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raises each capital source's effective cost.
raises only the cost of external equity.
reduces the cost of debt.
reduces each capital source's effective cost.
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Question 17
Multiple Choice
Which of these makes this a true statement? The WACC formula
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is not impacted by taxes.
uses the after-tax costs of capital to compute the firm's weighted average cost of debt financing.
uses the pre-tax costs of capital to compute the firm's weighted average cost of debt financing.
focuses on operating costs only to keep them separate from financing costs.
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Question 18
Multiple Choice
Which of these makes this a true statement? When determining the appropriate weights used in calculating a WACC, it should reflect
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the relative sizes of the total book capitalizations for each kind of security that the firm issues.
the relative sizes of the total market capitalizations for each kind of security that the firm issues.
only the market after-tax cost of debt.
only the market after-tax cost of equity.
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Question 19
Multiple Choice
Any debt and preferred stock components of capital should
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use project-specific, not firmwide, WACC figures.
use firmwide, not project-specific, WACC figures.
use project-specific figures.
not be issued.
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Question 20
Multiple Choice
Which of these are fees paid by firms to investment bankers for issuing new securities?
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flotation costs
interest expense
seller financing charges
user fees
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