Exam 13: Estimating the Cost of Capital

Suppose that the median price?to?earnings ratio for the S&P 500 is 20.If the long?run return on equity is 11.5 percent and the long?run growth in gross domestic product (GDP )is expected to be 6 percent (3.5 percent real growth and 2.5 percent inflation),what is the cost of equity implied by the equity-denominated key value driver formula?

Which of the following most accurately describes the types of companies where the yield to maturity on outstanding bonds is an appropriate proxy for the cost of debt?

While estimating the cost of debt for a firm,one should always use market prices for publicly traded debt.

Which of the following is NOT an input into the Fama-French three-factor model?

A firm has a target debt-to-equity ratio of 3.Its cost of equity equals 12 percent,its cost of debt is 9 percent,and the tax rate is 34 percent.What is the WACC?

The weights to use in the WACC should reflect the:

What challenges did the financial crisis of 2008 and its aftermath pose for estimating a firm's cost of capital? How should one handle these challenges?

One should create a synthetic risk-free rate by adding the expected inflation rate to the long-term historical average real risk-free rate for the period following the financial crisis.

To estimate the risk-free rate in developed economies,the analyst should use:

To estimate a company's beta,using an industry-derived unlevered beta relevered to the company's target capital structure is preferred to directly estimating a company-specific beta.

Which of the following is NOT true concerning the index recommended for use in the CAPM?

Since the factors and their measurement for use in the arbitrage pricing theory (APT )model have become fairly standardized,the APT model is becoming a more popular alternative to the CAPM in estimating the market risk premium.