Question 1

A firm with cyclical earnings is characterized by:

Accepted Answer

A) revenue patterns that vary with the business cycle. 
B) high levels of debt in its capital structure. 
C) high fixed costs. 
D) high costs per unit. 
E) low contribution margins. 
A) revenue patterns that vary with the business cycle. 
B) high levels of debt in its capital structure. 
C) high fixed costs. 
D) high costs per unit. 
E) low contribution margins.

Question 2

A firm's WACC can be correctly used to discount the expected cash flows of a new project when that project will:

Accepted Answer

A) have the same level of risk as the firm's current operations. 
B) be financed solely with new debt and internal equity. 
C) be managed by the firm's current managers. 
D) be financed based on the firm's current debt-equity ratio. 
E) be financed solely with internal equity. 
A) have the same level of risk as the firm's current operations. 
B) be financed solely with new debt and internal equity. 
C) be managed by the firm's current managers. 
D) be financed based on the firm's current debt-equity ratio. 
E) be financed solely with internal equity.

Question 3

The cost of capital used to compute the present value of a project should be the rate that can be earned on:

Accepted Answer

A) the overall market portfolio. 
B) the sponsoring firm's return on assets. 
C) a financial asset of comparable risk. 
D) a riskless asset with a similar life span. 
E) the sponsoring firm's return on equity. 
A) the overall market portfolio. 
B) the sponsoring firm's return on assets. 
C) a financial asset of comparable risk. 
D) a riskless asset with a similar life span. 
E) the sponsoring firm's return on equity.

Question 4

Ladder Works has debt outstanding with a coupon rate of 6 percent and a yield to maturity of 6.8 percent.What is the aftertax cost of debt if the tax rate is 21 percent? Assume all interest is tax deductible.

Accepted Answer

A) 5.37 percent 
B) 4.86 percent 
C) 4.74 percent 
D) 5.29 percent 
E) 5.13 percent 
A) 5.37 percent 
B) 4.86 percent 
C) 4.74 percent 
D) 5.29 percent 
E) 5.13 percent

Question 5

Phil's Carvings wants to have a weighted average cost of capital of 9.5 percent.The firm has an aftertax cost of debt of 6.5 percent and a cost of equity of 12.75 percent.What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?

Accepted Answer

A) .84 
B) .92 
C) 1.08 
D) .76 
E) .67 
A) .84 
B) .92 
C) 1.08 
D) .76 
E) .67

Question 6

Comparing two otherwise equivalent firms,the beta of the common stock of the levered firm is ________ the beta of the common stock of the unlevered firm.

Accepted Answer

A) roughly equivalent to 
B) significantly less than 
C) slightly less than 
D) greater than 
E) equal to 
A) roughly equivalent to 
B) significantly less than 
C) slightly less than 
D) greater than 
E) equal to

Question 7

Explain a)the factors that determine a security's beta and b)how asset beta relates to equity beta.

Accepted Answer

∙ The key factors affecting a security's

Question 8

Assume LK Metals is similar to its industry with one exception; it has low fixed costs relative to all other firms in that industry.Given this,you should expect LK Metals to have:

Accepted Answer

A) a lower beta than its industry. 
B) the same beta as the industry but a lower beta than the other firms in the industry. 
C) a higher beta than its industry. 
D) a higher beta than the industry and all the firms within that industry. 
E) the same beta as the industry but a higher beta than the other firms in the industry. 
A) a lower beta than its industry. 
B) the same beta as the industry but a lower beta than the other firms in the industry. 
C) a higher beta than its industry. 
D) a higher beta than the industry and all the firms within that industry. 
E) the same beta as the industry but a higher beta than the other firms in the industry.

Question 9

Hu's has 25,000 shares of common stock outstanding with a beta of 1.4,a market price of $32 a share,and a dividend yield of 5.7 percent.Dividends increase by 4.2 percent annually.The firm also has $450,000 of debt outstanding that is selling at 102 percent of par that has a yield to maturity of 6.8 percent.The tax rate is 21 percent and all interest is tax deductible.The firm is considering a project that has the same risk level as the firm's current operations,an initial cost of $328,000 and cash inflows of $52,500,$155,000,and $225,000 for Years 1 to 3,respectively.What is the NPV of the project?

Accepted Answer

A) $28,515 
B) $31,492 
C) $36,511 
D) $27,006 
E) $30,157 
A) $28,515 
B) $31,492 
C) $36,511 
D) $27,006 
E) $30,157

Question 10

Assume you plot the monthly returns for a stock and also for the S&P 500.Using regression analysis,the straight line through these points that is developed by the analysis is referred to as the ________ which has a slope of ________ and an intercept of ________.

Accepted Answer

A) security market line; alpha; gamma 
B) characteristic line; beta; alpha 
C) characteristic line; alpha; beta 
D) security market line; beta; gamma 
E) characteristic line; gamma; alpha 
A) security market line; alpha; gamma 
B) characteristic line; beta; alpha 
C) characteristic line; alpha; beta 
D) security market line; beta; gamma 
E) characteristic line; gamma; alpha

Question 11

The discount rate applied to an individual project should be based on the:

Accepted Answer

A) sources of funding for that project. 
B) risks associated with the project's cash flows. 
C) sponsoring firm's average level of risk. 
D) expertise of the project's managers. 
E) size and duration of the project's life. 
A) sources of funding for that project. 
B) risks associated with the project's cash flows. 
C) sponsoring firm's average level of risk. 
D) expertise of the project's managers. 
E) size and duration of the project's life.

Question 12

JR's is preparing to start a new project in an industry that differs significantly from its current operations.JR's has searched and found the beta of a firm that is a good fit as a pure play for this new project.Given this good fit,why might JR's assign a higher beta to the project than the beta of the pure play?

Accepted Answer

A) JR's should assign a project beta that is based on the average of JR's and the pure play firm's betas. 
B) The expected project revenues may be less cyclical than those of the pure play firm. 
C) JR's may use less debt in its operations than does the pure play firm. 
D) The pure play firm has more experience in the new area than JR's does. 
E) The project may incur flotation costs so a higher beta is warranted to offset the additional cost. 
A) JR's should assign a project beta that is based on the average of JR's and the pure play firm's betas. 
B) The expected project revenues may be less cyclical than those of the pure play firm. 
C) JR's may use less debt in its operations than does the pure play firm. 
D) The pure play firm has more experience in the new area than JR's does. 
E) The project may incur flotation costs so a higher beta is warranted to offset the additional cost.

Question 13

Albert's recently paid its annual dividend of $1.98 per share.At that time,the firm announced that all future dividends will be increased by 2.2 percent annually.What is the firm's cost of equity if the stock is currently selling for $28.40 a share?

Accepted Answer

A) 9.33 percent 
B) 11.32 percent 
C) 10.47 percent 
D) 11.08 percent 
E) 10.06 percent 
A) 9.33 percent 
B) 11.32 percent 
C) 10.47 percent 
D) 11.08 percent 
E) 10.06 percent

Question 14

A firm has an equity beta of 1.2,the risk-free rate is 3.4 percent,the market return is 15.7 percent,and the pretax cost of debt is 9.4 percent.The debt-equity ratio is .47.If you apply the common beta assumptions,what is the firm's asset beta?

Accepted Answer

A) .82 
B) .61 
C) .67 
D) .58 
E) .73 
A) .82 
B) .61 
C) .67 
D) .58 
E) .73

Question 15

High Road Tours has an aftertax cost of debt of 5.1 percent at its current tax rate of 34 percent.What will its aftertax cost of debt be if the tax rate drops to 21 percent? Assume all interest is tax deductible.

Accepted Answer

A) 6.10 percent 
B) 5.92 percent 
C) 6.17 percent 
D) 4.03 percent 
E) 4.47 percent 
A) 6.10 percent 
B) 5.92 percent 
C) 6.17 percent 
D) 4.03 percent 
E) 4.47 percent

Question 16

A project with the same level of risk as an all-equity firm should be accepted if the project's:

Accepted Answer

A) internal rate of return exceeds the firm's cost of equity capital. 
B) expected rate of return exceeds the market rate of return. 
C) anticipated rate of return exceeds the firm's return on assets. 
D) internal rate of return is positive given this level of risk. 
E) expected rate of return exceeds the risk-free rate. 
A) internal rate of return exceeds the firm's cost of equity capital. 
B) expected rate of return exceeds the market rate of return. 
C) anticipated rate of return exceeds the firm's return on assets. 
D) internal rate of return is positive given this level of risk. 
E) expected rate of return exceeds the risk-free rate.

Question 17

The issuance of stock to fund a project tends to:

Accepted Answer

A) have no effect on the previous shareholders. 
B) create costless benefits for the firm. 
C) cause any potential gains to the firm from the project to be lost. 
D) affect future dividends but not the appreciation realized by previous shareholders. 
E) dilute the capital gains that would have been earned by the previous shareholders. 
A) have no effect on the previous shareholders. 
B) create costless benefits for the firm. 
C) cause any potential gains to the firm from the project to be lost. 
D) affect future dividends but not the appreciation realized by previous shareholders. 
E) dilute the capital gains that would have been earned by the previous shareholders.

Question 18

If a firm applies its overall firm's beta to projects with varying levels of risk,the firm will tend to:

Accepted Answer

A) reject the riskiest projects. 
B) accept all low-risk projects. 
C) accept only projects of equal risk to its current operations. 
D) remain at its current level of overall risk. 
E) become riskier over time. 
A) reject the riskiest projects. 
B) accept all low-risk projects. 
C) accept only projects of equal risk to its current operations. 
D) remain at its current level of overall risk. 
E) become riskier over time.

Question 19

Downtown Stores can issue equity at a flotation cost of 8.76 percent and debt at 5.93 percent.The firm currently has a debt-equity ratio of .37 but prefers a ratio of .35.What should this firm use as their weighted average flotation cost?

Accepted Answer

A) 8.26 percent 
B) 8.03 percent 
C) 8.34 percent 
D) 8.37 percent 
E) 8.00 percent 
A) 8.26 percent 
B) 8.03 percent 
C) 8.34 percent 
D) 8.37 percent 
E) 8.00 percent

Question 20

Winslow and Sons is expected to pay an annual dividend of $1.35 per share one year from now with future increases of 2.5 percent annually.The stock currently sells for $14.70 a share.What is the cost of equity?

Accepted Answer

A) 13.48 percent 
B) 12.29 percent 
C) 12.60 percent 
D) 11.68 percent 
E) 13.23 percent 
A) 13.48 percent 
B) 12.29 percent 
C) 12.60 percent 
D) 11.68 percent 
E) 13.23 percent

Exam 13: Risk, cost of Capital, and Valuation

A firm with cyclical earnings is characterized by:

A firm's WACC can be correctly used to discount the expected cash flows of a new project when that project will:

The cost of capital used to compute the present value of a project should be the rate that can be earned on:

Ladder Works has debt outstanding with a coupon rate of 6 percent and a yield to maturity of 6.8 percent.What is the aftertax cost of debt if the tax rate is 21 percent? Assume all interest is tax deductible.

Phil's Carvings wants to have a weighted average cost of capital of 9.5 percent.The firm has an aftertax cost of debt of 6.5 percent and a cost of equity of 12.75 percent.What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?

Comparing two otherwise equivalent firms,the beta of the common stock of the levered firm is ________ the beta of the common stock of the unlevered firm.

Explain a)the factors that determine a security's beta and b)how asset beta relates to equity beta.

Assume LK Metals is similar to its industry with one exception; it has low fixed costs relative to all other firms in that industry.Given this,you should expect LK Metals to have:

Assume you plot the monthly returns for a stock and also for the S&P 500.Using regression analysis,the straight line through these points that is developed by the analysis is referred to as the ________ which has a slope of ________ and an intercept of ________.

The discount rate applied to an individual project should be based on the:

Albert's recently paid its annual dividend of $1.98 per share.At that time,the firm announced that all future dividends will be increased by 2.2 percent annually.What is the firm's cost of equity if the stock is currently selling for $28.40 a share?

A firm has an equity beta of 1.2,the risk-free rate is 3.4 percent,the market return is 15.7 percent,and the pretax cost of debt is 9.4 percent.The debt-equity ratio is .47.If you apply the common beta assumptions,what is the firm's asset beta?

High Road Tours has an aftertax cost of debt of 5.1 percent at its current tax rate of 34 percent.What will its aftertax cost of debt be if the tax rate drops to 21 percent? Assume all interest is tax deductible.

A project with the same level of risk as an all-equity firm should be accepted if the project's:

The issuance of stock to fund a project tends to:

If a firm applies its overall firm's beta to projects with varying levels of risk,the firm will tend to:

Downtown Stores can issue equity at a flotation cost of 8.76 percent and debt at 5.93 percent.The firm currently has a debt-equity ratio of .37 but prefers a ratio of .35.What should this firm use as their weighted average flotation cost?

Winslow and Sons is expected to pay an annual dividend of $1.35 per share one year from now with future increases of 2.5 percent annually.The stock currently sells for $14.70 a share.What is the cost of equity?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Lessons From Market History

Return, risk, and the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers,acquisitions,and Divestitures

Financial Distress

International Corporate Finance

Filters

Assume you plot the monthly returns for a stock and also for the S&P 500.Using regression analysis,the straight line through these points that is developed by the analysis is referred to as the which has a slope of and an intercept of .