Multiple Choice Questions

The weighted average cost of capital is defined as the weighted average of a firm's:
  • dividend growth model and SML
  • cost of equity, cost of preferred, and its aftertax cost of debt.
  • look at the project's risk in comparison to the firm's risk
  • market conditionsthe firm's capital structure and dividend policythe firm's investment policy
(T/F) Preferred stock is valued using the capital asset pricing model.
  • True
  • False
(T/F) An increase in the market value of preferred stock will increase a firm's weighted average cost of capital.
  • True
  • False
What represents the minimum rate of return a firm must earn on its assets if it is to maintain the current value of its securities?
  • Weighted average cost of capital
  • decrease the firm's cost of capital.
  • dividend growth model and SML
  • everything is a market value, not a book value
An increase in a levered firm's tax rate will:
  • Weighted average cost of capital
  • dividend growth model and SML
  • decrease the firm's cost of capital.
  • the required return on a company's debt
(T/F) The cost of preferred stock is unaffected by the issuer's tax rate.
  • True
  • False
Subjective approach
  • the required return on a company's debt
  • look at the project's risk in comparison to the firm's risk
  • look at other company's betas to calculate CAPM
  • decrease the firm's cost of capital.
(T/F) The cost of preferred stock remains constant from year to year.
  • True
  • False
How do you calculate the cost of preferred stock
  • perpetuity
  • dividend growth model and SML
  • True
  • decrease the firm's cost of capital.
What are the two approaches for calculating cost of equity?
  • dividend growth model and SML
  • decrease the firm's cost of capital.
  • Weighted average cost of capital
  • the required return on a company's debt
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Multiple Choice Questions
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