Ch 14 Flashcards
(20 cards)
COE (dividend model)
(dividend 1*(1+growth rate)/price)-growth rate
COE capital using CAPM
risk free+(beta(ER market-risk free))
pretax COD
use TVM solver, makesure to get PMT by (coupon rate*FV)/2, make sure pv is negative multiply the I% by 2 to find the annual pretax cost of debt
aftertax COD
pretax COD(1-tax rate)
To determine a firm’s cost of capital, one must include:
the returns currently required by both debtholders and stockholders.
A firm is able to borrow money at a rate of 7.35 percent per year. This interest rate is called the:
cost of debt
A firm has a debt-equity ratio of .44. All of the firm’s outstanding shares were purchased by a small number of investors. The return these investors require is called the:
cost of equity
For any given capital project proposal, the discount rate should be based on the:
risks associated with the use of the funds required by the project.
When calculating a firm’s weighted average cost of capital, the capital structure weights
are based on the market values of the outstanding securities
A firm’s aftertax cost of debt will increase if there is a(n):
decrease in the company’s tax rate.
a statement regarding a firm’s pretax cost of debt
It is based on the current yield to maturity of the company’s outstanding bonds.
The weighted average cost of capital:
is the return investors require on the total assets of the firm.
The dividend growth model:
is only as reliable as the estimated rate of growth.
A firm has a debt-equity ratio of .52. The firm uses the capital asset pricing model to determine its cost of equity. Accordingly, the firm’s estimated cost of equity:
is dependent upon a reliable estimate of the market risk premium.
What role does cost of capital play in the NPV decision rule?
It serves as the discount rate
What role does the cost of capital play in the IRR decision rule?
It serves as the hurdle rate.
What are the components of cost of capital?
cost of debt
cost of equity
weight of debt
weight of equity
tax rate
What are the methods we can used to determine the cost of Equity
Dividend Growth model
SML approach
CAPM model
Which one of the following statements is correct?
A. We can use the dividend growth model for firms that do
not pay dividends.
B. If we need to determine cost of equity for a new riskier
project, the SML approach should be used.
C. If we need to determine cost of equity for a private
company, we should use the dividend growth model.
B. If we need to determine cost of equity for a new riskier
project, the SML approach should be used.
Which component of cost of capital enters into the WACC formula on
an after-tax basis?
cost of debt
