What should the cost of capital used in capital budgeting reflect? The cost of equity only The highest possible return on investment The pre-tax cost of all financial resources The average after-tax cost of providing required returns to investors

The average after-tax cost of providing required returns to investors

How are the component costs of capital determined? They are fixed by the company's financial department They are determined by government regulations They are market-determined variables based on investors' required returns They are based on historical cost data

They are market-determined variables based on investors' required returns

Is the before-tax cost of debt used as the component cost of debt for developing the firm's WACC? It depends on the firm's tax strategy True, the before-tax cost is used False, the after-tax cost is used Only for short-term debt

False, the after-tax cost is used

If a company's tax rate increases but the YTM on its noncallable bonds remains the same, what happens to the after-tax cost of its debt? The after-tax cost of its debt will rise The after-tax cost of its debt will fall The after-tax cost of its debt will double The after-tax cost of its debt will remain unchanged

The after-tax cost of its debt will fall

Is the cost of debt equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt? True, it is calculated this way Only for callable debt False, it is based on the interest rate on new debt It depends on the firm's financial policy

False, it is based on the interest rate on new debt

How is the cost of debt calculated? It is the average coupon rate on all outstanding debt It is the pre-tax interest rate on all debt It is the historical average interest rate It is equal to one minus the marginal tax rate multiplied by the interest rate on new debt

It is equal to one minus the marginal tax rate multiplied by the interest rate on new debt

Does the cost of preferred stock need to be adjusted to an after-tax figure? False, preferred dividends are not tax-deductible Only for preferred stock issued after 2020 Only if the firm has a high tax rate True, because 50% of dividends are excluded from taxable income

False, preferred dividends are not tax-deductible

Cost of Capital: Components, Calculation Methods and Application in Finance

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Finance - Personal Finance

georgepetenjk Created by 10 mon ago

Cards in this deck(60)

What is sometimes defined as funds supplied to a firm by investors?

What should the cost of capital used in capital budgeting reflect?

How are the component costs of capital determined?

Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC)?

Is the before-tax cost of debt used as the component cost of debt for developing the firm's WACC?

If a company's tax rate increases but the YTM on its noncallable bonds remains the same, what happens to the after-tax cost of its debt?

Is the cost of debt equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt?

How is the cost of debt calculated?

What effect does an increase in a firm's marginal tax rate have on the cost of debt used to calculate its WACC?

Does the cost of preferred stock need to be adjusted to an after-tax figure?

How is the cost of perpetual preferred stock calculated?

Is the component cost of equity for a company that pays half of its earnings as common dividends and half as preferred dividends calculated as Rs(0.30)(0.50) + Rps(1 - T)(0.50)(0.50)?

If a firm has a zero tax rate due to accounting losses, is it possible for the after-tax cost of preferred stock to be less than the after-tax cost of debt?

How is the cost of common equity obtained?

Should reinvested earnings be considered as the first source of capital because they have no cost to the firm?

Funds acquired by _____ are considered in the firm's capital structure.

Can the cost of equity raised by retaining earnings be less than, equal to, or greater than the cost of external equity?

Is the firm's cost of external equity raised by issuing new stock the same as the required rate of return on the firm's outstanding common stock?

Why do reinvested earnings have a cost equal to rs?

What are the potential problems when estimating the cost of equity using the CAPM?

Which method is widely used in practice for estimating the cost of common stock from reinvested earnings?

If expectations for long-term inflation rose, would this have a greater impact on the required rate of return on equity or the interest rate on long-term debt?

If investors' aversion to risk rose, causing the slope of the SML to increase, what would be the impact on the required rate of return on equity compared to the interest rate on long-term debt?

When working with the CAPM, which factor can be determined with the most precision?

What does beta measure in relation to a publicly-owned firm?

What are the advantages of equity in relation to following and earnings?

If a firm's stock price is temporarily depressed, should all additional capital funds be raised using debt?

For capital budgeting and cost of capital purposes, how should a firm assume each dollar of capital is obtained?

Should firms use their WACC to evaluate all capital budgeting projects?

Why is the weighted average cost of capital (WACC) normally greater than rd(1 − T)?

Does a lower firm's tax rate result in a lower after-tax cost of debt and WACC?

Why does a company need to adjust for taxes when calculating the cost of debt?

What should a company do to align its current actual market value weights with its target weights?

Why is there an 'opportunity cost' associated with using reinvested earnings?

How is 'correct' measured in relation to statements and that?

Should the required return on debt used in calculating a firm's WACC be based on the debt's current required return?

Is the cost of equity always equal to or greater than the cost of debt?

Why should a cost be assigned to reinvested earnings?

Do all shareholders, whether existing or new, have the same required rate of return on stock?

Why is the CAPM widely used for estimating the cost of equity?

Does a higher firm's flotation cost for new common equity increase the likelihood of using preferred stock?

Is the cost of external equity capital raised by issuing new common stock defined as the cost of equity capital from retaining earnings divided by one minus the percentage flotation cost?

If the expected dividend growth rate is zero, how is the cost of external equity capital raised by issuing new common stock calculated?

For a typical firm, which sequence of rates is CORRECT? Assume all rates are after taxes and the firm operates at its target capital structure.

Will the WACC for a firm that pays dividends and regularly issues new equity be greater than for an otherwise identical company that pays lower dividends and rarely issues new equity?

Why is it difficult to estimate the cost of equity for a privately owned firm?

What are the main differences when comparing and contrasting projects in relation to risk?

Why is it conceptually correct to use different risk-adjusted costs of capital for different capital budgeting projects?

Which project should Bloom and Co. accept if Division X's cost of capital is 10.0% and Division Y's cost is 14.0%?

What is the impact of not adjusting for risk in project evaluation on a firm's intrinsic value?

If Careco Company and Audaco Inc merge and evaluate all projects at the new overall corporate WACC, what is likely to happen?

Which project is less risky to a firm: Project A with a 20% standard deviation and negative correlation, or Project B with a 10% standard deviation and positive correlation?

What is the consequence of assigning the same cost of capital to all projects regardless of risk?

Which project should Taylor Inc. accept if Project B is of below-average risk with a return of 8.5%?

What should Weatherall Enterprises do if its policy is to increase the required return on a riskier-than-average project to 3% over rS?

What is likely to happen if the CEO's position of using the same WACC for all projects is accepted?

If Acme Industries uses the same cost of capital to evaluate all projects for the next 10 years, what will most likely happen?

Would an increase in the debt ratio to 60% decrease the weighted average cost of capital (WACC)?

What action would reduce Flagstaff Inc.'s need to issue new common stock?

Which event would reduce Burnham Brothers Inc.'s WACC?

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