A) If a firm has a beta that is less than 1.0, say 0.9, this would suggest that the expected returns on its assets are negatively correlated with the returns on most other firms' assets.
B) If a firm's managers want to maximize the value of the stock, they should, in theory, concentrate on project risk as measured by the standard deviation of the project's expected future cash flows.
C) If a firm evaluates all projects using the same cost of capital, and the CAPM is used to help determine that cost, then its risk as measured by beta will probably decline over time.
D) Projects with above-average risk typically have higher-than-average expected returns. Therefore, to maximize a firm's intrinsic value, its managers should favor high-beta projects over those with lower betas.
E) Project A has a standard deviation of expected returns of 20%, while Project B’s standard deviation is only 10%. A’s returns are negatively correlated with both the firm’s other assets and the returns on most stocks in the economy, while B’s returns are positively correlated. Therefore, Project A is less risky to a firm and should be evaluated with a lower cost of capital.
G) D) and E)
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B) False
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B) False
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A) 4.28%
B) 4.46%
C) 4.65%
D) 4.83%
E) 5.03%
G) None of the above
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A) 28.36%
B) 29.54%
C) 30.77%
D) 32.00%
E) 33.28%
G) A) and D)
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A) 9.06%
B) 9.44%
C) 9.84%
D) 10.23%
E) 10.64%
G) C) and D)
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C
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A) 0.57%
B) 0.63%
C) 0.70%
D) 0.77%
E) 0.85%
G) A) and B)
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A) 8.15%
B) 8.48%
C) 8.82%
D) 9.17%
E) 9.54%
G) A) and B)
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A) Since the costs of internal and external equity are related, an increase in the flotation cost required to sell a new issue of stock will increase the cost of retained earnings.
B) Since its stockholders are not directly responsible for paying a corporation's income taxes, corporations should focus on before-tax cash flows when calculating the WACC.
C) An increase in a firm's tax rate will increase the component cost of debt, provided the YTM on the firm's bonds is not affected by the change in the tax rate.
D) When the WACC is calculated, it should reflect the costs of new common stock, retained earnings, preferred stock, long-term debt, short-term bank loans if the firm normally finances with bank debt, and accounts payable if the firm normally has accounts payable on its balance sheet.
E) If a firm has been suffering accounting losses that are expected to continue into the foreseeable future, and therefore its tax rate is zero, then it is possible for the after-tax cost of preferred stock to be less than the after-tax cost of debt.
G) None of the above
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E
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A) The project should definitely be accepted because its expected return (before any risk adjustments) is greater than its required return.
B) The project should definitely be rejected because its expected return (before risk adjustment) is less than its required return.
C) Riskier-than-average projects should have their expected returns increased to reflect their higher risk. Clearly, this would make the project acceptable regardless of the amount of the adjustment.
D) The accept/reject decision depends on the firm's risk-adjustment policy. If Norris' policy is to increase the required return on a riskier-than-average project to 3% over rS, then it should reject the project.
E) Capital budgeting projects should be evaluated solely on the basis of their total risk. Thus, insufficient information has been provided to make the accept/reject decision.
G) All of the above
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D
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A) 8.72%
B) 9.08%
C) 9.44%
D) 9.82%
E) 10.22%
G) B) and C)
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A) M should have the lower WACC because it is like most other companies, and investors like that fact.
B) M and W should have identical WACCs because their risks as measured by the standard deviation of returns are identical.
C) If M and W merge, then the merged firm MW should have a WACC that is a simple average of M's and W's WACCs.
D) Without additional information, it is impossible to predict what the merged firm's WACC would be if M and W merged.
E) Since M and W move counter cyclically to one another, if they merged, the merged firm's WACC would be less than the simple average of the two firms' WACCs.
G) B) and E)
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A) 10.85%
B) 11.19%
C) 11.53%
D) 11.88%
E) 12.24%
G) B) and E)
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B) False
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A) A Division B project with a 13% return.
B) A Division B project with a 12% return.
C) A Division A project with an 11% return.
D) A Division A project with a 9% return.
E) A Division B project with an 11% return.
G) A) and E)
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A) 11.15%
B) 11.73%
C) 12.35%
D) 13.00%
E) 13.65%
G) B) and E)
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A) 7.16%
B) 7.54%
C) 7.93%
D) 8.35%
E) 8.79%
G) All of the above
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A) In the WACC calculation, we must adjust the cost of preferred stock (the market yield) to reflect the fact that 70% of the dividends received by corporate investors are excluded from their taxable income.
B) We should use historical measures of the component costs from prior financings that are still outstanding when estimating a company's WACC for capital budgeting purposes.
C) The cost of new equity (re) could possibly be lower than the cost of retained earnings (rs) if the market risk premium, risk-free rate, and the company's beta all decline by a sufficiently large amount.
D) Its cost of retained earnings is the rate of return stockholders require on a firm's common stock.
E) The component cost of preferred stock is expressed as rp(1 - T) , because preferred stock dividends are treated as fixed charges, similar to the treatment of interest on debt.
G) D) and E)
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A) 12.70%
B) 13.37%
C) 14.04%
D) 14.74%
E) 15.48%
G) D) and E)
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A) 6.89%
B) 7.26%
C) 7.64%
D) 8.04%
E) 8.44%
G) A) and E)
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