Finance 571 - Corporate Finance » Spring 2022 » Wk 2 Practice Ch. 13, The Weighted-Average Cost of Capital
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Question #1
The company cost of capital is calculated as a weighted average of the firm's _______ and _______.
A.
debt; equity
B.
net income; short-term debt
C.
assets; liabilities
D.
debt; net working capital
Question #2
A project requires a $1 million initial investment and has an expected after-tax cash flow of $2.4 million per year in perpetuity. The weighted-average cost of capital (WACC) is 13%. What is the net present value (NPV) of the project?
A.
$10.77 million
B.
$17.46 million
C.
$1.4 million
D.
$18.46 million
Question #3
Another name for the WACC is the ___________.
A.
systematic cost of capital
B.
global cost of capital
C.
company cost of capital
D.
project specific cost of capital
Question #4
The WACC is the appropriate discount rate for use with ______ projects but should be adjusted ______ for higher risk ones.
A.
risk-free; upward
B.
average; upward
C.
average; downward
D.
low-risk; considerably
Question #5
It is acceptable to use book values of debt and equity to calculate the weights of debt and equity for the company's cost of capital calculation.
A.
True
B.
False
Question #6
Preferred stock is valued like perpetuity. The price of preferred stock is therefore equal to ______.
A.
dividend/rpreferred
B.
dividend × rpreferred
C.
dividend − rpreferred
D.
dividend + rpreferred
Question #7
Potter National Bank has a beta of 1.8. The risk-free rate is currently quoted at 1.5% and the expected market risk premium is 7.5%. What is Potter's cost of equity?
A.
14.5%
B.
15.0%
C.
15.5%
D.
15.7%
Question #8
A project requires a $12 million initial investment and has expected after-tax cash flows of $2 million in perpetuity. The weighted-average cost of capital is 15%. What is the project's net present value (NPV)?
A.
$66.67 million
B.
$13.33 million
C.
$93.33 million
D.
$1.33 million
Question #9
The WACC is the appropriate discount rate for use with ______ projects but should be adjusted ______ for lower risk ones.
A.
average; upward
B.
risk-free; downward
C.
average; downward
D.
average; slightly upward
Question #10
The cost of capital used by firms should be based on _____ values of the firm's securities.
A.
initial
B.
assessment
C.
basic
D.
market
Question #11
Martin Co. has issued preferred stock with an annual dividend of $6.00. The current market price per share of this preferred stock is $47.00. What is the expected return on the Martin preferred stock?
A.
19.9%
B.
12.8%
C.
13.5%
D.
12.6%
Question #12
The firm's cost of equity is usually calculated using the _______ equation.
A.
WACC
B.
net working capital
C.
CAPM
D.
free cash flow
Question #13
Vandalay Industries has $30 million of debt and $70 million of equity outstanding. The market cost of debt is 8% and the cost of equity is 14%. The firm has a 35% corporate tax rate. What is Vandalay's WACC?
A.
12.36%
B.
11.00%
C.
11.36%
D.
11.63%
Question #14
The increase in the rate that bondholders demand as the amount of debt borrowed increases is called the _______ cost of debt.
A.
external
B.
explicit
C.
internal
D.
implicit
Question #15
If the corporate tax rate is zero, then increasing the proportion of debt in a firm's capital structure causes the WACC to _______.
A.
increase
B.
increase then decrease
C.
decrease
D.
remain unchanged
Question #16
If a firm uses its book value of debt instead of its market value of debt to calculate its WACC, then its WACC will likely be ______.
A.
much lower than it should be
B.
much higher than it should be
C.
only slightly off
Question #17
On a large and healthy firm, the use of yield to maturity as the cost of debt when calculating WACC is appropriate because ______.
A.
interest rate risk is negligible
B.
bankruptcy is sufficiently low
C.
it will trend toward its long-run average
D.
it's legally required to do so
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