Two techniques for determining the cost of equity include using: 1. The Security Market Line, and 2. The Internal Rate of Return. Indicate whether the statement is true or false. ANSWER Answer: FALSE Explanation: Two techniques for determining the cost of equity include using: 1. The Security Market Line, and 2. The Dividend […]
When determining the cost of bond financing a firm must determine the net proceeds from the sale of the bond less the flotation cost charged by the investment banker to estimate the yield-to-maturity. Indicate whether the statement is true or false. ANSWER Answer: TRUE
Use the dividend growth model to determine the required rate of return for equity. Your firm recently paid a dividend of $2.25 per share, has a recent price of $40.20 per share, and anticipates a growth rate in dividends of 3.00% per year for the foreseeable future. A) 8.76% B) 8.60% C) 8.44% D) There […]
Which of the following is an advantage of the dividend growth approach over the SML in estimating the required return on equity? A) The dividend growth model uses market information but the SML does not. B) Dividend growth is known, whereas estimating beta for the SML is an art form. C) It is easy to […]
Which of the following is a difference between debt and equity capital? A) Debt capital does not require periodic payments, whereas equity capital requires period payments. B) Debt capital requires returns in proportion to profits, whereas equity capital requires a fixed rate of return. C) Debt capital provides a tax shield, whereas equity capital does […]
The most fundamental services that governments provide to firms are: a. the establishment of product and financial markets. b. the regulation of industries. c. the establishment of property rights and the enforcement of legal contracts. d. building infrastructure and monitoring managers. ANSWER D
Which of the following are tax-deductible expenses for corporations? A) Interest expenses B) Preferred stock dividends C) Common stock dividends D) All are tax-deductible for corporations. ANSWER Answer: A
Which of the following is the proper way to adjust the cost of debt to estimate the after-tax cost of debt? A) Rd ÷ (1 + Tc) B) Rd ÷ (1 – Tc) C) Rd × (1 – Tc) D) Rd × (1 + Tc) ANSWER Answer: C
When calculating the after-tax weighted average cost of capital (WACC), which of the following costs is adjusted for taxes in the equation? A) The before-tax cost of equity B) The before-tax cost of debt C) The before-tax cost of preferred stock D) The after-tax cost of debt ANSWER Answer: B Explanation: B) WACCadj […]
Revenue stability affects ________. A) dividend risk B) maturity risk C) business risk D) interest rate risk ANSWER C
