The Weighted-average Cost Of Capital And Company Valuation

This question bank verified by Studydeets

All Questions

Question 1

Free

True/False

Capital structure refers to a firm's mix of long-term debt and equity financing.

Choose correct answer/s

True

False

Check answer

Question 2

Free

True/False

The company cost of capital is the expected rate of return that investors demand from the company's assets and operations.

Choose correct answer/s

True

False

Check answer

Question 3

Free

True/False

The company cost of capital is the minimum acceptable rate of return for any project the firm undertakes.

Choose correct answer/s

True

False

Check answer

Question 4

Free

True/False

The weighted-average cost of capital is the expected rate of return on a portfolio of all the firm's securities,adjusted for the tax savings on interest payments.

Choose correct answer/s

True

False

Check answer

Question 5

Free

True/False

If a project has a zero NPV when the expected cash flows are discounted at the weighted-average cost of capital,then the project's cash flows are just sufficient to give debtholders and shareholders the return they require.

Choose correct answer/s

True

False

Check answer

Question 6

True/False

A firm's cost of capital should be computed using the book weights of each financing source.

Choose correct answer/s

True

False

To unlock the question

Question 7

True/False

There are two costs of debt finance.The explicit cost of debt is the rate of interest that bondholders demand.But there is also an implicit cost,because higher levels of debt increase the required rate of return to equity.

Choose correct answer/s

True

False

To unlock the question

Question 8

True/False

The weighted-average cost of capital is the return the company needs to earn after tax in order to satisfy all its security holders.

Choose correct answer/s

True

False

To unlock the question

Question 9

True/False

If the firm decreases its debt ratio,both the debt and the equity will become riskier.The debtholders and equityholders will require a higher return to compensate for the increased risk.

Choose correct answer/s

True

False

To unlock the question

Question 10

True/False

A firm's weighted-average cost of capital will generally increase if the firm lowers its debt-equity ratio.

Choose correct answer/s

True

False

To unlock the question

Question 11

True/False

Preferred stock should be ignored when computing a firm's weighted-average cost of capital.

Choose correct answer/s

True

False

To unlock the question

Question 12

True/False

Both the capital asset pricing model and the dividend discount model can be used to determine the cost of equity financing.

Choose correct answer/s

True

False

To unlock the question

Question 13

True/False

The cost of equity will generally increase for risky firms when the risk-free rate of return increases.

Choose correct answer/s

True

False

To unlock the question

Question 14

True/False

Interest tax shields are available to the firm on debt and preferred stock but not on common equity.

Choose correct answer/s

True

False

To unlock the question

Question 15

True/False

New projects should be undertaken by firms only if they have the same risk as existing assets.

Choose correct answer/s

True

False

To unlock the question

Question 16

True/False

Projects that have a zero NPV when the cash flows are discounted at the WACC will provide just sufficient returns to creditors and shareholders.

Choose correct answer/s

True

False

To unlock the question

Question 17

True/False

As a firm increases its debt ratio,debtholders are likely to demand higher rates of return.

Choose correct answer/s

True

False

To unlock the question

Question 18

True/False

An increase in a firm's debt ratio will have no effect on the required rate of return for equity holders.

Choose correct answer/s

True

False

To unlock the question

Question 19

True/False

A firm's cost of capital should be used as the discount rate for every new project the firm considers.

Choose correct answer/s

True

False

To unlock the question

Question 20

True/False

The mix of a company's short-term financing is referred to as its capital structure.

Choose correct answer/s

True

False

To unlock the question