Questions:
1. If a firm just paid a dividend equal to $4.00 a share, then for the WACC, in order to find the cost of equity, $4 should be:
divided by the current price of the stock, and the quotient should be added to the dividend growth rate.
divided by the current price of the stock.
multiplied by one minus the tax rate, and the difference divided by the current price of the stock.
multiplied by the sum of one plus the growth rate, and then divided by the current price of the stock; this quotient should be added to the dividend growth rate.
2. Which of the following statements regarding the cost of debt is true?
The cost of debt for bonds equals the coupon rate of outstanding bonds.
The cost of debt for bonds is found by dividing the price by the annual coupon.
The cost of debt for bonds is found by calculating their yield to maturity.
The cost of debt equals the flotation costs charged by investment bankers who advise the firm.
3. The discount rate used in project evaluation should:
be based on the firm's overall risk.
be based on each project's risk.
be estimated using the WACC for all projects.
All of the above are correct.
4. The financing mix reflected in the WACC should:
reflect the desired mix and not necessarily the mix being used to finance a specific project.
vary from project to project, depending on how they are financed.
always reflect the firm's current capital structure.
None of these answers is correct.
5. Which of the following best describes a pure-play?
a private firm that is held in isolation in a one-company investment portfolio
a publicly traded firm that is similar to the company or project being analyzed
Both a and b are correct.
Neither a nor b is correct.
6. In the Capital Asset Pricing Model, the market risk premium is estimated over a long period of time because:
more data is always better than less.
a longer holding period gives a more reliable estimate because it is, in effect, a larger sample size.
almost all investors hold stocks for many years, so it matches their investment horizon.
historical returns are the best indicators of future returns.
7. In the Capital Asset Pricing Model, the market risk premium is best approximated by:
the most recent one-year return on the S&P 500 Index (or another market index).
the long-term historic return on a stock market index such as the S&P 500 (or another market index).
the long-term average spread of the S&P 500 (or another market index) over the yield of long-term government bonds.
the return of the S&P 500 (or another market index) over the current yield of long-term government bonds.
8. Which of the following statements regarding the cost of equity is true?
It can be estimated in three different ways.
It is always estimated using the present value of future dividends approach.
It is estimated by solving for the discount rate for a perpetuity.
It is generally lower than the cost of debt because equity holders are paid after taxes are paid.
9. Investors will make an investment if:
the historical rate of return exceeds the expected rate of return.
the required rate of return exceeds the expected rate of return.
the expected rate of return exceeds the actual rate of return.
the expected rate of return exceeds the required rate of return.
10. Total risk is measured by:
the standard deviation of returns.
the firm's beta.
Moody's, Standard & Poor's, and Fitch ratings.
the variability of EBIT.