corporation-finance-test-bank-chapter-14

Chapter14-CostofCapital14-1Chapter14CostofCapitalAnswerKeyMultipleChoiceQuestions1.AgroupofindividualsgottogetherandpurchasedalloftheoutstandingsharesofcommonstockofDLSmith,Inc.Whatisthereturnthattheseindividualsrequireonthisinvestmentcalled?A.dividendyieldB.costofequityC.capitalgainsyieldD.costofcapitalE.incomereturnRefertosection14.2AACSB:N/ABloom's:KnowledgeDifficulty:BasicLearningObjective:14-1Section:14.2Topic:Costofequity2.TextileMillsborrowsmoneyatarateof13.5percent.Thisinterestrateisreferredtoasthe:A.compoundrate.B.currentyield.C.costofdebt.D.capitalgainsyield.E.costofcapital.Refertosection14.3AACSB:N/ABloom's:KnowledgeDifficulty:BasicLearningObjective:14-2Section:14.3Topic:CostofdebtChapter14-CostofCapital14-23.Theaverageofafirm'scostofequityandaftertaxcostofdebtthatisweightedbasedonthefirm'scapitalstructureiscalledthe:A.rewardtoriskratio.B.weightedcapitalgainsrate.C.structuredcostofcapital.D.subjectivecostofcapital.E.weightedaveragecostofcapital.Refertosection14.4AACSB:N/ABloom's:KnowledgeDifficulty:BasicLearningObjective:14-3Section:14.4Topic:Weightedaveragecostofcapital4.Whenamanagerdevelopsacostofcapitalforaspecificprojectbasedonthecostofcapitalforanotherfirmwhichhasasimilarlineofbusinessastheproject,themanagerisutilizingthe_____approach.A.subjectiveriskB.pureplayC.divisionalcostofcapitalD.capitaladjustmentE.securitymarketlineRefertosection14.5AACSB:N/ABloom's:KnowledgeDifficulty:BasicLearningObjective:14-5Section:14.5Topic:PurePlayChapter14-CostofCapital14-35.Afirm'scostofcapital:A.willdecreaseastherisklevelofthefirmincreases.B.foraspecificprojectisprimarilydependentuponthesourceofthefundsusedfortheproject.C.isindependentofthefirm'scapitalstructure.D.shouldbeappliedasthediscountrateforanyprojectconsideredbythefirm.E.dependsuponhowthefundsraisedaregoingtobespent.Refertosection14.1AACSB:N/ABloom's:ComprehensionDifficulty:BasicLearningObjective:14-3Section:14.1Topic:Costofcapital6.Theweightedaveragecostofcapitalforawholesaler:A.isequivalenttotheaftertaxcostofthefirm'sliabilities.B.shouldbeusedastherequiredreturnwhenanalyzingapotentialacquisitionofaretailoutlet.C.isthereturninvestorsrequireonthetotalassetsofthefirm.D.remainsconstantwhenthedebt-equityratiochanges.E.isunaffectedbychangesincorporatetaxrates.Refertosection14.1AACSB:N/ABloom's:ComprehensionDifficulty:BasicLearningObjective:14-3Section:14.1Topic:WACCChapter14-CostofCapital14-47.Whichoneofthefollowingistheprimarydeterminantofafirm'scostofcapital?A.debt-equityratioB.applicabletaxrateC.costofequityD.costofdebtE.useofthefundsRefertosection14.1AACSB:N/ABloom's:KnowledgeDifficulty:BasicLearningObjective:14-3Section:14.1Topic:Costofcapital8.ScholasticToysisconsideringdevelopinganddistributinganewboardgameforchildren.Theprojectissimilarinrisktothefirm'scurrentoperations.Thefirmmaintainsadebt-equityratioof0.40andretainsallprofitstofundthefirm'srapidgrowth.Howshouldthefirmdetermineitscostofequity?A.byaddingthemarketriskpremiumtotheaftertaxcostofdebtB.bymultiplyingthemarketriskpremiumby(1-0.40)C.byusingthedividendgrowthmodelD.byusingthecapitalassetpricingmodelE.byaveragingthecostsbasedonthedividendgrowthmodelandthecapitalassetpricingmodelRefertosection14.2AACSB:N/ABloom's:ComprehensionDifficulty:BasicLearningObjective:14-1Section:14.2Topic:CostofequityChapter14-CostofCapital14-59.Allelseconstant,whichoneofthefollowingwillincreaseafirm'scostofequityifthefirmcomputesthatcostusingthesecuritymarketlineapproach?Assumethefirmcurrentlypaysanannualdividendof$1ashareandhasabetaof1.2.A.areductioninthedividendamountB.anincreaseinthedividendamountC.areductioninthemarketrateofreturnD.areductioninthefirm'sbetaE.areductionintherisk-freerateRefertosection14.2AACSB:N/ABloom's:ComprehensionDifficulty:IntermediateLearningObjective:14-1Section:14.2Topic:CAPM10.Afirm'soverallcostofequityis:A.isgenerallylessthatthefirm'sWACCgivenaleveragedfirm.B.unaffectedbychangesinthemarketriskpremium.C.highlydependentuponthegrowthrateandrisklevelofthefirm.D.generallylessthanthefirm'saftertaxcostofdebt.E.inverselyrelatedtochangesinthefirm'staxrate.Refertosection14.2AACSB:N/ABloom's:ComprehensionDifficulty:BasicLearningObjective:14-1Section:14.2Topic:CostofequityChapter14-CostofCapital14-611.Thecostofequityforafirm:A.tendstoremainstaticforfirmswithincreasinglevelsofrisk.B.increasesastheunsystematicriskofthefirmincreases.C.ignoresthefirm'sriskswhenthatcostisbasedonthedividendgrowthmodel.D.equalstherisk-freerateplusthemarketriskpremium.E.equalsthefirm'spretaxweightedaveragecostofcapital.Refertosection14.2AACSB:N/ABloom's:ComprehensionDifficulty:BasicLearningObjective:14-1Section:14.2Topic:Costofequity12.Thedividendgrowthmodelcanbeusedtocomputethecostofequityforafirminwhichofthefollowingsituations?I.firmsthathavea100percentretentionratioII.firmsthatpayaconstantdividendIII.firmsthatpayanincreasingdividendIV.firmsthatpayadecreasingdividendA.IandIIonlyB.IandIIIonlyC.IIandIIIonlyD.I,II,andIIIonlyE.II,III,andIVonlyRefertosection14.2AACSB:N/ABloom's:ComprehensionDifficulty:BasicLearningObjecti