Ch13 Flashcards
(15 cards)
What is the Cost of Capital?
A) Only the Cost of Debt
B) Only the Cost of Equity
C) A blend of the Cost of Debt and Cost of Equity, where the weights of debt and equity vary
D) The weighted average of the Cost of Debt and Cost of Equity
What is the relationship between Market Value of Equity, Market Value of Debt, and Market Value of Assets (Firm value)?
A) Market Value of Equity - Market Value of Debt = Market Value of Assets
B) Market Value of Equity + Market Value of Debt = Market Value of Assets
C) Market Value of Equity × Market Value of Debt = Market Value of Assets
D) Market Value of Equity / Market Value of Debt = Market Value of Assets
B
What does “leverage” refer to in the context of a firm’s balance sheet?
A) The total assets on the balance sheet
B) The relative amount of equity on the balance sheet
C) The relative amount of debt on the balance sheet
D) The overall profitability of the firm
C
The fact that the interest paid on debt is a tax deductible expense increases the cost of debt financing.
True
False
F. Decrease
Effective Cost of Debt
rD(1-Tc)
YTM=Rd
T
What is Levered Value in the context of an investment?
A) The value of an investment without considering any interest tax deduction
B) The value of an investment, including the benefit of the interest tax deduction, based on the firm’s leverage policy
C) The total value of the firm’s assets
D) The value of an investment excluding any debt financing
B
How is the Levered Value of a project determined in the WACC Valuation Method?
A) By discounting future cash flows at the cost of equity
B) By discounting future cash flows at the firm’s WACC
C) By considering only the cost of debt in discounting future cash flows
D) By using a fixed interest rate for discounting future cash flows
B
When a company considers issuing new equity or bonds for financing, why is external financing typically considered more costly than using retained earnings?
A) External financing involves higher interest rates on bonds.
B) Issuing new equity or bonds incurs additional costs such as fees and legal expenses.
C) Retained earnings are subject to more taxes than external financing options.
D) External financing is less flexible in adjusting to changing financial needs.
B
Which of the following statements is FALSE?
* A) External equity is less expensive than retained earnings.
* B) A project that can be financed with internal funds will be less costly than the same
project if it were financed with external funds.
* C) Issuance costs should be treated as cash outflows in NPV analysis.
* D) Issuance costs increase the WACC.
A
Firms that have many divisions with different lines of business should not use a
companywide WACC to evaluate projects.
T
To attract capital from outside investors, a firm must
offer potential investors an expected return that is commensurate with the
level of risk that they can bear.
T
The relative proportion of debt, equity, and other securities that a firm
has outstanding constitute its ________. A: Retained earnings B: Capital
Structure C: Asset ratio D: Current Ratio
B
A firm raised all its capital via equity rather than debt. Such a firm is
also referred to as a(n) ________ firm. A: unlevered B: levered
A
