You are on page 1of 21

AgroupofindividualsgottogetherandpurchasedalloftheoutstandingsharesofcommonstockofDLSmith,Inc.Whatistheretu Answer a. dividendyield b. costofequity c. capitalgainsyield d. costofcapital e. incomereturn TextileMillsborrowsmoneyatarateof13.5percent.Thisinterestrateisreferredtoasthe: Answer a. compoundrate b. currentyield c. costofdebt d. capitalgainsyield e.

costofcapital

Theaverageofafirm'scostofequityandaftertaxcostofdebtthatisweightedbasedonthefirm'scapitalstructureiscalledthe: Answer a. rewardtoriskratio b. weightedcapitalgainsrate c. structuredcostofcapital d. subjectivecostofcapital e. weightedaveragecostofcapital

Thecostofequityforafirm: Answer a. tendstoremainstaticforfirmswithincreasinglevelsofrisk b. increasesastheunsystematicriskofthefirmincreases c. ignoresthefirm'sriskswhenthatcostisbasedonthedividendgrowthmodel d. equalstherisk-freerateplusthemarketriskpremium e. equalsthefirm'spretaxweightedaveragecostofcapital

Thedividendgrowthmodelcanbeusedtocomputethecostofequityforafirminwhichofthefollowingsituations? I. firms that have a 100 percent retention ratio II. firms that pay a constant dividend III. firms that pay an increasing dividend IV. firms that pay a decreasing dividend Answer a. IandIIonly b. IandIIIonly c. IIandIIIonly d. I,IIandIIIonly e. II,IIIandIVonly

Thecostofpreferredstock: Answer a. isequaltothedividendyield b. isequaltotheyieldtomaturity c. ishighlydependentonthedividendgrowthrate d. isindependentofthestock'sprice e. decreaseswhentaxratesincrease The weighted average cost of capital for a firm may be dependent upon the firm's: I. rate of growth. II. debt-equity ratio. III. preferred dividend payment. IV. retention ratio. Answer a. IandIIIonly b. IIandIVonly c. I,IIandIVonly d. I,IIIandIVonly e. I,II,IIIandIV

IfafirmusesitsWACCasthediscountrateforalloftheprojectsitundertakesthenthefirmwilltendto: I. reject some positive net present value projects. II. accept some negative net present value projects. III. favor high risk projects over low risk projects. IV. increase its overall level of risk over time. Answer a. IandIIIonly b. IIIandIVonly c. I,IIandIIIonly d. I,IIandIVonly e. I,II,IIIandIV

Thediscountrateassignedtoanindividualprojectshouldbebasedon: Answer a. thefirm'sweightedaveragecostofcapital b. theactualsourcesoffundingusedfortheproject c. anaverageofthefirm'soverallcostofcapitalforthepastfiveyears d. thecurrentriskleveloftheoverallfirm e. therisksassociatedwiththeuseofthefundsrequiredbytheproject

Whichoneofthefollowingstatementsiscorrect? Answer a. Firmsshouldacceptlowriskprojectspriortofundinghighriskprojects b. Makingsubjectiveadjustmentstoafirm'sWACCwhendeterminingprojectdiscountratesunfairlypunishe c. Aprojectthatisunacceptabletodaymightbeacceptabletomorrowgivenachangeinmarketreturns d. Thepureplaymethodismostfrequentlyusedforprojectsinvolvingtheexpansionofafirm'scurrentopera e. Firmsthatelecttousethepureplaymethodfordeterminingadiscountrateforaprojectcannotsubjectiv

Phil'sisasit-downrestaurantthatspecializesinhome-cookedmeals.Theresa'sisawalk-indelithatspecializesinspecialtysoupsa Answer a. Phil'sonly b. Theresa'sonly c. bothPhil'sandTheresa's d. neitherPhil'snorTheresa's e. cannotbedeterminedfromtheinformationprovided

ommonstockofDLSmith,Inc.Whatisthereturnthattheseindividualsrequireonthisinvestmentcalled?

donthefirm'scapitalstructureiscalledthe:

whichofthefollowingsituations?

thefirmwilltendto:

miningprojectdiscountratesunfairlypunisheslow-riskdivisionswithinafirm morrowgivenachangeinmarketreturns volvingtheexpansionofafirm'scurrentoperations adiscountrateforaprojectcannotsubjectivelyadjustthepureplayrate

walk-indelithatspecializesinspecialtysoupsandsandwiches.Bothfirmsarecurrentlyconsideringexpandingtheiroperationsduringthesummermon

dingtheiroperationsduringthesummermonthsbyofferingpre-wrappeddonuts,sandwiches,andwrapsatalocalbeach.Phil'scurrentlyhasaWACC

psatalocalbeach.Phil'scurrentlyhasaWACCof14percentwhileTheresa'sWACCis10percent.Theexpansionprojecthasaprojectednetpresentva

pansionprojecthasaprojectednetpresentvalueof$12,600ata10percentdiscountrateandanetpresentvalueof-$2,080ata14percentdiscount

entvalueof-$2,080ata14percentdiscountrate.Whichfirmorfirmsshouldexpandandofferfoodatthelocalbeachduringthesummermonths?

helocalbeachduringthesummermonths?