Reference no: EM131019310

The weighted average cost of capital is used as a discount rate because

A) It is an indication of how much the firm is earning overall.

B) as long as the cost of capital is earned, the common stock value of the firm will be maintained.

C) It is comparable to the prevailing market interest rates.

D) Returns below the cost of capital will cover all fixed costs associated with capital and provide an excess return to stockholders.

Although debt financing is usually the cheapest component of capital, it cannot be used to excess because

A) interest rates may change.

B) the firm's stock price will increase and raise the cost of equity financing.

C) the financial risk of the firm may increase and thus drive up the cost of all sources of financing.

D) underwriting costs may change.

Which is not true about debt financing and the weighted average cost of capital?

A) Debt is usually the cheapest source of financing.

B) As the level of debt increases beyond the optimum capital structure, the cost of capital increases.

C) No debt in the firm's capital structure will minimize the firm's weighted-average cost of capital.

D) None of the above.

Within the capital asset pricing model

A) the risk-free rate is usually higher than the return in the market.

B) the higher the beta the lower the required rate of return.

C) beta measures the volatility of an individual stock relative to a stock market index.

D) two of the above are true.

Retained earnings has a cost associated with it because:

A) new funds must be raised.

B) There is an opportunity cost associated with stockholder funds.

C) Ke > g

D) flotation cost increase the cost of funding.

Which of the following is not a time-adjusted method for ranking investment proposals?

A) Net present value method

B) Payback method

C) Internal rate of return method

D) All of the above are time-adjusted methods

The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method

A) assumes that cash flows are reinvested at the project's internal rate of return.

B) concentrates on the liquidity aspects of investment projects.

C) assumes that cash flows are reinvested at the firm's weighted average cost of capital.

D) none of the above.

Risk is usually measured as the

A) potential loss.

B) variability of outcomes around some expected value.

C) probability of expected values.

D) potential expected loss.

Risk may be integrated into capital budgeting decisions by

A) adjusting the standard deviation of possible outcomes.

B) determining the expected value.

C) adjusting the discount rate.

D) adjusting the time horizon.

Leasing is a popular form of financing because

A) lease provisions are generally less restrictive than a bond indenture.

B) the lessor likely has experience with the equipment being leased.

C) the lessee may not be financially able to purchase.

D) all of the above

Preferred stock may be good for a company because it

A) expands the capital base of the firm without diluting the common stock ownership.

B) does not require interest payment in times of financial trouble, but are tax-deductible when dividends are paid.

C) is not as costly as common stock or bonds.

D) gives up no control even when dividend payments are missed.

If a preferred stock is of the cumulative type

A) dividends must be paid on an equal basis with common so long earnings permit.

B) dividends cannot be passed if they are earned.

C) the cumulative voting rule applies in the exercise of the voting privilege.

D) unpaid dividends of one period must be carried forward and paid in subsequent periods before anything can be paid to common stockholders.

A major desire of stockholders regarding dividend policy is

A) frequent stock dividends.

B) dividend stability.

C) high payouts when earnings are up and lower payouts when earnings are down.

D) payment of dividends at frequent intervals.

A stock dividend will

A) increase the total value of stockholders' equity.

B) decrease the total value of stockholders' equity.

C) not affect the total value of stockholders' equity.

D) change the total value of stockholders' equity but the direction cannot be determined unless the market price and par value is known.