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Capital structure refers to a company's: (Points : 1)
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investment of capital.
management of working capital-current assets and liabilities.
mix of debt and equity used to fund the firm's assets.
mix of marketable securities.
| The Hamada Equation allows the firm to: (Points : 1) |
solve for a company's total risk.
adjust the beta of a pure-play firm for its use of debt financing.
estimate its asset beta.
Both b and c are correct.
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| The weighted average cost of capital is: (Points : 1) |
the average return for the company's stock over the past several years.
the average cost, including commissions, for raising capital for the firm.
an average required return for each of the sources of capital used by the firm to finance its projects, weighted by the amount contributed by each source.
interest payments and dividends, divided by the price of bonds and stock, respectively.
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| If a firm just paid a dividend equal to $4.00 a share, then for the WACC, in order to find the cost of equity, $4 should be: (Points : 1) |
divided by the current price of the stock, and the quotient should be added to the dividend growth rate.
divided by the current price of the stock.
multiplied by one minus the tax rate, and the difference divided by the current price of the stock.
multiplied by the sum of one plus the growth rate, and then divided by the current price of the stock; this quotient should be added to the dividend growth rate.
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| A bond pays semiannual coupon payments of $30 each. It matures in 20 years and is selling for $1,200. What is the firm's cost of debt if the bond's par value is $1,000? (Don't forget this is a semiannual coupon.) (Points : 1) |
2.23%
4.48%
1.80%
3.60%
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| Which of the following best describes a pure-play? (Points : 1) |
a private firm that is held in isolation in a one-company investment portfolio
a publicly traded firm that is similar to the company or project being analyzed
Both a and b are correct.
Neither a nor b is correct.
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| Which of the following is true of flotation costs? (Points : 1) |
They include expenses like investment banker fees and commissions.
They include the underwriting spread.
They tend to raise the cost of capital.
all of the above
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| Investors will make an investment if: (Points : 1) |
the historical rate of return exceeds the expected rate of return.
the required rate of return exceeds the expected rate of return.
the expected rate of return exceeds the actual rate of return.
the expected rate of return exceeds the required rate of return.
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| Suppose a zero-coupon bond is selling for $614.00 today. It promises to pay $1,000 in exactly 10 years with annual compounding. What is the firm's after-tax cost of debt if this is its sole debt outstanding (assuming the firm is in the 20% tax bracket)? (Points : 1) |
4%
5%
6%
7%
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| Which of the following is beta is used for? (Points : 1) |
estimating a regression line
estimating a firm's total risk to be used in the WACC
estimating a firm's market risk and used with the CAPM
estimating the amount of leverage used by the firm
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| One reason why we are not concerned with idiosyncratic risk (also called firm-specific risk) is that: (Points : 1) |
most risk is not firm-specific, so we can ignore it.
through hedging and insurance, investors may now invest in stocks with almost no risk exposure of any kind.
it is easy and almost costless to diversify one's portfolio and eliminate idiosyncratic risk.
investing in bonds can offset the idiosyncratic risks of shares of stock. |
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