Cost of Capital flashcards

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High beta projects are projects with _________ risk and should be evaluated using a _______ cost of equity capital. high; high
True or False: The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project. False
True or False: There is no tax effect to consider when calculating the component cost of preferred stock for capital budgeting purposes. True
True or False: The before-tax cost of debt is the yield-to-maturity adjusted for flotation costs. True
True or False: A firm's capital structure policy affects its weighted average cost of capital. True
When calculating the component cost of debt for capital budgeting purposes for profitable, tax-paying firms, the tax adjustmen reduces the component cost of debt
True or False: The weighted average cost of capital for a given capital budget level is a weighted average of the marginal cost of each relevant capital component that makes up the firm's target capital structure. True
Which of the following statements is correct?
A ) Although some methods of estimating the cost of equity capital encounter severe difficulties, the CAPM is a simple and reliable model that provides great accuracy and consistency in estimating the cost of equity capital.
B ) The DCF model is preferred over other models to estimate the cost of equity because of the ease with which a firms growth rate is obtained.
C ) The bond-yield-plus-risk-premium approach to estimating the cost of equity is not always accurate but its advantages are that it is a standardized and objective model.
D ) None of the statements above is correct.
D ) None of the statements above is correct.
When calculating the component cost of debt for capital budgeting purposes for profitable, tax-paying firms, the tax adjustment:
A ) reduces the component cost of debt
B ) does not affect the component cost of debt
C ) increases the component cost of debt
A ) reduces the component cost of debt
Since retained earnings are generated by the firm:
A ) there is no component cost for these funds.
B ) the funds have a positive cost that is more than new equity issues.
C ) the funds have a positive cost that is less than new equity issues.
C ) the funds have a positive cost that is less than new equity issues.

High beta projects are projects with _________ risk and should be evaluated using a _______ cost of equity capital.

True or False: The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project.

True or False: There is no tax effect to consider when calculating the component cost of preferred stock for capital budgeting purposes.

True or False: The before-tax cost of debt is the yield-to-maturity adjusted for flotation costs.

True or False: A firm's capital structure policy affects its weighted average cost of capital.

When calculating the component cost of debt for capital budgeting purposes for profitable, tax-paying firms, the tax adjustmen

True or False: The weighted average cost of capital for a given capital budget level is a weighted average of the marginal cost of each relevant capital component that makes up the firm's target capital structure.

Which of the following statements is correct?
A ) Although some methods of estimating the cost of equity capital encounter severe difficulties, the CAPM is a simple and reliable model that provides great accuracy and consistency in estimating the cost of equity capital.
B ) The DCF model is preferred over other models to estimate the cost of equity because of the ease with which a firms growth rate is obtained.
C ) The bond-yield-plus-risk-premium approach to estimating the cost of equity is not always accurate but its advantages are that it is a standardized and objective model.
D ) None of the statements above is correct.

When calculating the component cost of debt for capital budgeting purposes for profitable, tax-paying firms, the tax adjustment:
A ) reduces the component cost of debt
B ) does not affect the component cost of debt
C ) increases the component cost of debt

Since retained earnings are generated by the firm:
A ) there is no component cost for these funds.
B ) the funds have a positive cost that is more than new equity issues.
C ) the funds have a positive cost that is less than new equity issues.

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