Hmg 6477 quiz, Accounting and Financial Management Quizz Answers
A firm’s cost of capital is:
the average cost of raising funds.
the key driver of the overall value of the firm.
reflects the required rate of return of investors and lenders.
All responses are true ***
At a firm level, the lower the cost of raising funds, the more valuable the firm will be.
TRUE ***
It is possible for a firm to generate an after-tax profit on an investment but to still consider the project unacceptable due to insufficient return.
TRUE ***
How many randomly selected securities must be added to a portfolio so that on average almost all of the risk that can be diversified away has been diversified away?
1-3
20-30***
100-150
450-550
The risk that can be eliminated through the practice of diversification is known as ________ risk.
Unsystematic***
Systematicnon
Diversifiable
Speculative
Diversification of stocks reduces unsystematic or firm-specific risk, leaving systematic or market risk.
TRUE ***
If a firm has publicly traded debt then the yield to maturity is approximately the same as:
the after-tax cost of debt.
the before-tax cost of debt.***
the 10-year Treasury bond rate.
the WACC.
Janis Corp. just issued an annual dividend of $2.50 per share. The firm anticipates the growth rate in dividends will be 3% annually for the foreseeable future. If the current price is $61 per share, what is the required rate of return for the firm’s equity?
7.22 % ***
Which of the following is NOT a key component of the CAPM?
Beta
diversifiable risk***
the risk-free rate
the market risk premium
Freightway Trucking Inc. uses the CAPM to help estimate their cost of equity. Given the following information, what is the firm’s estimated cost of equity? The risk-free return in the market is currently 3%, the market risk premium is 8%, the expected return on the market portfolio if 11% and the firm has a beta of 1.50
15.00% ***
To estimate the after-tax cost of common stock you must:
None, because common stock dividend payments are not tax deductible for the firm.***
Most of the time the book values and market values for equity are very similar, but this is not true for debt.
FALSE ***
Cedar Computer Systems Inc. has two projects under consideration and a WACC of 10%. Project Alpha has a hurdle rate of 12% while project Beta has a hurdle rate of 8%. If project Alpha has an expected return of 11% and project Beta has an expected return of 11%, which project(s), if any, should the firm accept?
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