CH 13 Flashcards
The relative proportion of debt, equity, and other securities that a firm has outstanding constitute its _________.
A) asset ratio
B) current ratio
C) Capital structure
D) retained earning
C
A firm’s overall cost of capital that is a blend of the costs of the different sources of capital is known as the firm’s _________.
A) weighted average cost of capital
B) cost of equity infusion
C) cost of debt
D) cost of preferred stock
A
The ______ of a firm’s debt can be used as the firm’s current cost of debt
A) current yield
B) coupon rate
C) yield to maturity
D) discount yield
C
The after-tax cost of debt _______ the before-tax cost of debt for a firm that has a positive marginal tax rate.
A) is always greater than
B) is always equal to
C) is always less than
D) may be greater than or less than
C
When calculating the WACC, it is a standard practice to subtract ________ to compute the net debt outstanding.
A) equity
B) dividends
C) cash and risk-free securities
D) coupons
C
Many financial managers use market risk premium that are closer to 5%, which is lower than historical averages, because ________.
A) the return investors require as compensation for taking on the risk of investing in equity markets has diminished over a period of time
B) investors require a higher risk premium for holding risky securities than in the past
C) investors require a supernormal risk premium for holding risky securities as compared with the past
D) investors require the same premium for holding risky securities as in the past
A
When we use WACC to assess a project, we assume that the ______ ratio does to change.
A) reward to systematic risk
B) risk to reward
C) debt to equity
D) volatility to systematic risk
C
When we compute the cost of equity capital for a project we assume that the _______ of the project is equivalent to the average market risk of the firm’s investments.
A) diversifiable risk
B) market risk
C) unsystematic risk
D) volatility
B
Divisional costs of capital are more appropriate when evaluating a project for a line of business when the types of business in a firm are _________.
A) mature businesses
B) similar
C) new businesses
D) different
D
Different divisions with differing lines of business use different costs of capital because their cost of _______ could be different.
A) debt
B) equity
C) capital
D) assets
C
Which of the following statements is FALSE?
A) Issuance costs increase the WACC
B) External equity is less expensive than retained earnings
C) A project that can be financed with internal funds will be less costly than the same project if it were financed with external funds.
D) Issuance costs should be treated as cash outflows in NPV analysis
B
Financial managers must determine their firm’s overall cost of capital based on all sources
of financing.
TRUE
To attract capital from outside investors, a firm must offer potential investors an expected
return that is commensurate with the level of risk that they can bear.
True
One should use accounting-based book values rather than market values of debt and
equity to determine the weights for the different sources of capital.
FALSE
A firm’s sources of financing, which usually consists of debt and equity, represent its
________.
A) total assets
B) capital
C) total liabilities
D) current liabilities
B
The relative proportion of debt, equity, and other securities that a firm has outstanding
constitute its ________.
A) asset ratio
B) current ratio
C) capital structure
D) retained earnings
C
A firm’s overall cost of capital that is a blend of the costs of the different sources of capital
is known as the firm’s ________.
A) weighted average cost of capital
B) cost of equity infusion
C) cost of debt
D) cost of preferred stock
A
