Q&A Hero

Q: For a particular firm, depending on tax rates, flotation costs, and the attitude of investors, the cost of new common equity, re, can be less than, equal to, or greater than its before-tax cost of debt, rd. a. True b. False

Q: A firm's cost of external equity capital (cost of issuing new stock) is equal to the rate of return that stockholders demand (require) to invest in the firm's outstanding common stock. a. True b. False

Q: The cost of issuing preferred stock must be adjusted for taxes because preferred stock dividend payments represent a tax-deductible expense for the firm. a. True b. False

Q: The component costs of capital are market-determined variables in as much as they are based on investors' required returns. a. True b. False

Q: The rates of return, or costs, that a firm must pay to raise funds to invest in capital budgeting projects are determined by the: a. marginal revenue generated by projects in which the firm invests. b. investors who purchase the firm's stocks and bonds in the financial markets. c. internal rate of return the firm earns on its investments. d. cash flows generated by the investment in capital budgeting projects. e. firm's dividend payout ratio.

Q: To determine the actual cost of using debt, a firm must adjust its bonds' average yield to maturity for the fact that _____. a. interest payments on debt represent taxable income to the firm b. interest payments on debt represent a tax deductible expense to the firm c. the average yield to maturity on its debt is a positive return that the firm receives (earns) d. the average yield to maturity on the firm's debt determines the tax rate that it pays on its operating income e. the firm's bondholders do not have to pay taxes on the interest they receive from the firm

Q: The value of any assetreal or financialis based on the _____ and the _____. a. weighted average cost of the investment; rate of return achieved by the firm b. cash flow expected to be generated by the asset; the rate of return required by investors c. marginal return an investor expects to earn from the investment; additional cash flow generated by the asset d. rate of return achieved by the investment firm; investors weighted average cost of investing their money e. rate of return earned by the firm; cash flow expected to be generated by the asset

Q: Everything else equal, an asset's value is: a. inversely related to the rate of return investors require to purchase it. b. directly proportional to the cost of debt used in the capital budgeting process of the firm. c. not related to the cash flows that the asset is expected to generate during its life. d. inversely related to the cost of debt used in the capital budgeting process of the firm. e. directly proportional to the rate of return investors require to purchase it.

Q: Marvelous Manufacturing (MM) generated the following information for its capital budgeting manager: Capital Structure Project Cost IRR Type of Capital Proportion W $65,000 15% Debt 30% X 70,000 13 Common equity 70 Y 75,000 12 Z 70,000 11 MM's weighted average cost of capital (WACC) is 12 percent if the firm does not have to issue new common equity; if new common equity is needed, its WACC is 16 percent. If MM expects to generate $70,000 in retained earnings this year, which project(s) should be purchased? Assume that the projects are independent and indivisible. a. Only Project W should be purchased. b. Projects W and X should be purchased. c. Projects W, X, and Y should be purchased. d. All of the projects should be purchased. e. None of the projects should be purchased.

Q: Luxury Production Materials (LPM) generated the following information for its capital budgeting manager: Capital Structure Project Cost IRR Type of Capital Proportion D $70,000 18.0% Debt 60.0% E 65,000 15.0 Common equity 40.0 F 75,000 14.0 G 72,000 12.0 LPMs weighted average cost of capital (WACC) is 13 percent if the firm does not have to issue new common equity; if new common equity is needed, its WACC is 16 percent. If LPM expects to generate $80,000 in retained earnings this year, which project(s) should be purchased? Assume that the projects are independent and indivisible. a. Only Project D should be purchased. b. Projects D and E should be purchased. c. Projects D, E, and F should be purchased. d. All of the projects should be purchased. e. None of the projects should be purchased.

Q: A graph of the capital budgeting projects a firm is evaluating ranked in the order of their internal rates of return is called a(n) _____. a. marginal cost of capital graph b. investment opportunity schedule (IOS) c. modified internal rate of return (MIRR) graph d. internal project classification schedule e. optimal capital budget (OCB) schedule

Q: A firm should continue to invest in capital budgeting projects until its marginal cost of capital is equal to the: a. net present value (NPV) of the last project purchased. b. internal rate of return (IRR) of the first project purchased. c. marginal return (internal rate of return, IRR) generated by the last project purchased. d. combined cost of all of the projects purchased. e. weighted average cost of capital for all of the projects purchased.

Q: Beige Inc. is evaluating three capital budgeting projects whose internal rates of return (IRRs) are greater than the firm's marginal cost of capital (MCC). Beige should choose: a. the projects that minimize its marginal cost of capital. b. all of the projects whose internal rates of return (IRRs) are greater than the firm's weighted average cost of capital WACC). c. the projects that maximize its dividend payout. d. the projects that generate the greatest combination of cash inflows. e. the one (single) project that has the highest net present value (NPV).

Q: If a project's _____ exceeds the firm's weighted average cost of capital (WACC), its net present value (NPV) will be positive. a. marginal cost of capital b. incremental operating cash flows c. inflation premium d. internal rate of return (IRR) e. initial investment outlay

Q: The investment opportunity schedule (IOS) shows the: a. costs of the capital components included in a firm's financing arrangements. b. total funds required to invest in capital budgeting projects the firm is evaluating for possible purchase. c. net present values of different projects the firm is evaluating. d. firm's average cost of capital. e. marginal increase in the weighted average cost of capital that results from changes in the capital components that the firm uses to finance new capital budgeting projects.

Q: Alpha Inc. combines the marginal cost of capital (MCC) schedule with the investment opportunity schedule (IOS) on a single graph. Which of the following areas on the MCC/IOS graph shows the maximum excess of marginal returns over marginal costs? a. The area that is below the marginal weighted average cost of capital (MCC) schedule b. The area that is above the IOS schedule c. The point of intersection of the MCC schedule and the IOS schedule d. The point of intersection of weighted average cost of capital (WACC) schedule and y-axis e. The area that is above the MCC schedule but below the IOS schedule when the IOS line is above the MCC line

Q: Following is information about Seasonal Products (SP) Corporation. The company has no preferred stock. Type of Proportion of the Type of Capital After-Tax Cost Capital Capital Structure Debt, rdT 6.5% Debt 40.0% Common equity Equity 60.0 Retained earnings, rs 12.0 New issue, re 15.0 The firm expects to retain $300,000 in earnings this year to invest in capital budgeting projects. If the SP's capital budget is expected to equal $550,000, what required rate of return, or marginal cost of capital, should be used when evaluating capital budgeting projects? a. 9.80% b. 11.60% c. 9.25% d. 11.17% e. 9.90%

Q: Following is information about Sleek Pleats (SP) Corporation. The company has no preferred stock. Type of Proportion of the Type of Capital After-Tax Cost Capital Capital Structure Debt, rdT 7.0% Debt 30.0% Common equity Equity 70.0 Retained earnings, rs 14.0 New issue, re 16.0 The firm expects to retain $210,000 in earnings this year to invest in capital budgeting projects. If the SP's capital budget is expected to equal $290,000, what required rate of return, or marginal cost of capital, should be used when evaluating capital budgeting projects? a. 11.9% b. 13.3% c. 10.5% d. 11.5% e. 12.3%

Q: Byron Corporation forecasts that its income will be $21,000 next year. The firm pays out 30 percent of earnings as dividends to common stockholders. Its target capital structure is 40 percent debt and 60 percent common equity. What Byron's retained earnings break point? a. $35,000 b. $24,500 c. $6,300 d. $36,750 e. $10,500

Q: Omega Inc. expects its net income to be $525,000 this year. The firm's dividend payout ratio is 60 percent. The firm is financed with 30 percent debt, and it has no preferred stock outstanding. What is the retained earnings break point for Omega Inc.? a. $315,000 b. $450,000 c. $210,000 d. $300,000 e. $700,000

Q: Allison Engines Corporation has established a target capital structure of 40 percent debt and 60 percent common equity. The firm expects to earn $150,000 in after-tax income during the coming year, and it will retain 30 percent of those earnings. What is the break point of retained earnings? a. $175,000 b. $75,000 c. $112,500 d. $500,000 e. $250,000

Q: The marginal cost of capital generally _____ as more capital is raised during a given period. a. remains constant b. decreases c. increases d. changes in an unpredictable way e. approaches zero

Q: A firm's weighted average cost of capital (WACC) is: a. set by the board of directors of the firm, because it is the benchmark they use to evaluate members of the senior management team. b. regulated by the Internal Revenue Service (IRS), because tax-deductible debt is included in the computation. c. determined by participants in the financial markets, because investors set the minimum return they require (demand) to provide the funds the firm invests in capital budgeting projects. d. the same as the average internal rate of return (IRR) the firm earns on its assets. e. the combined net present value (NPV) of all the capital budgeting projects in which the firm invests.

Q: The weighted average cost of capital of a firm represents the: a. minimum rate of return a firm must earn on average-risk investments to maintain its current value. b. maximum rate of return a firm can expect to earn on its investments. c. maximum interest rate a firm should pay on the debt it uses. d. minimum dividend yield a firm must pay to its preferred stockholders. e. required rate of return that should be used to evaluate capital budgeting projects that have above-average risk.

Q: Which of the following statements about the marginal cost of capital is correct? Assume everything else is equal. a. An increase in the tax rate will decrease a firm's marginal cost of debt. b. An increase in a company's stock price will increase its marginal cost of debt. c. An increase in a company's stock price will increase its marginal cost of issuing new common equity. d. An increase in the total capital raised during a particular period will decrease a firm's marginal cost of debt. e. A decrease in the weighted cost of capital (WACC) will decrease a firm's marginal cost of retained earnings.

Q: The target capital structure of a firm is the capital structure that: a. minimizes the operating risk of the firm's assets. b. maximizes the tax shield created by debt. c. minimizes the default risk of long-term debt. d. maximizes the price of the firm's stock. e. maximizes the dividends paid to common stockholders.

Q: Smith and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate. The firm's cost of preferred stock is 11 percent and its cost of retained earnings is 14 percent. The firm expects to generate $15,000 in retained earnings this year. Compute the weighted average cost of capital (WACC) break point associated with issuing new common stock. a. $17,500 b. $15,000 c. $30,000 d. $37,500 e. $150.000

Q: The marginal cost of capital (MCC) schedule generally rises, which implies that the weighted average cost of capital: a. increases as the firm achieves economies of scale in its financing arrangements. b. decreases as the firm uses more retrained earnings to finance capital budgeting projects. c. decreases as the firm uses a greater proportion of cheaper debt and a lower proportion of more expensive common stock. d. increases as the firm pays more taxes on higher levels of taxable income. e. generally increases because the firm incurs higher flotation costs and higher financial risk as it raises more funds through new debt and new equity issues.

Q: Which of the following is true of a break point on a firm's marginal cost of capital (MCC) schedule? a. A break point (BP) is defined as the last dollar of new total capital that can be raised before an increase in the firm's weighted average cost of capital (WACC) occurs. b. A break point (BP) is defined as the weighted average cost of capital (WACC) of the last dollar of new capital that a firm raises. c. A break point denotes the cost of obtaining an additional dollar of new capital that is required to meet the firm's capital budgeting needs. d. At the break point, the marginal cost of raising new capital equals the marginal revenues generated from investing the new capital. e. A break point shows the point at which the yield to maturity (YTM) on debt is equal to the firm's required rate of return.

Q: The _____ on a bond is the cost to the firm for using bondholders' funds. a. coupon rate b. market-to-face value c. yield to maturity (YTM) d. maturity value e. risk-free rate of return

Q: The average rate of return that investors require to provide funds to the firm in the form of debt is the ________. a. average coupon rate on the firm's bonds b. average yield to maturity (YTM) on the firm's bonds c. average maturity value of the firm's bonds d. firm's required rate of return e. average internal rate of return (IRR) the firm earns on its assets

Q: Which of the following cost of capital measures must be adjusted to account for tax savings? a. Cost of preferred stock b. Cost of debt, which is measured as the debt's yield to maturity (YTM) c. Cost of retained earnings d. Cost of new common equity e. Dividend yield

Q: Coral Inc.'s preferred stock currently sells for $90 a share and pays a dividend of $10 per share. However, the firm will net only $80 per share if it issues new preferred stock. What is Coral's cost of preferred stock? Coral's marginal tax rate is 35 percent. a. 8.13% b. 12.50% c. 11.11% d. 7.22% e. 11.76%

Q: Marigold Inc.'s common stock currently sells for $40 per share, but the firm will net only $34 per share if it issues new common stock. The firm recently paid a dividend equal to $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year. What is Marigold's cost of new common equity? a. 15.00% b. 15.88% c. 15.50% d. 16.47% e. 6.47%

Q: J. Ross and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. Ross' common stock currently sells for $40 per share. The firm recently paid a dividend equal to $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year. If it issues new common stock, the firm will incur flotation costs equal to 7 percent. What is the firm's cost of retained earnings? a. 15.00% b. 15.91% c. 15.50% d. 14.54% e. 16.50%

Q: Oval Inc. just paid a dividend equal to $1.50 per share on its common stock, and it expects this dividend to grow by 4 percent per year indefinitely. The firm plans to issue common stock, which has a $16 per share market price, to raise funds to support operations. Oval's investment bankers estimate that the flotation costs for new issues of common stock will be equal to 8 percent of the issue (market) price. What is Oval's cost of new common equity, re? a. 14.60% b. 13.38% c. 10.60% d. 8.76% e. 18.55%

Q: The Jackson Company just paid a dividend equal to $3.00 per share on its common stock, and it expects this dividend to grow by 7 percent per year indefinitely. The firm has a beta coefficient equal to 1.50, the risk-free rate is 10 percent, and the expected return on the market is 14 percent. According to the capital asset pricing model, what is Jackson's cost of retained earnings, rs? a. 23% b. 11% c. 7% d. 16% e. 21%

Q: Tangerine Inc.'s target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon rate, semiannual interest payments, a current maturity of 20 years, and a market value equal to their par value of $1,000. The firm's marginal tax rate is 40 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk-premium method to determine its cost of retained earnings. What is Tangerine's component cost of retained earnings? a. 8.0% b. 9.6% c. 11.2% d. 14.4% e. 16.0%

Q: Super Solutions Inc. just paid a dividend equal to $3.00 per share. Its stock sells for $33.00 per share, it is growing at an annual rate equal to 6 percent, which is expected to continue long into the future. What is Super's cost of retained earnings? a. 9.09% b. 15.64% c. 15.09% d. 9.64% e. 14.58%

Q: Alpha Inc.'s beta coefficient is 1.2, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Based on the capital asset pricing model (CAPM), what should be Alpha's cost of retained earnings? a. 11% b. 17% c. 12% d. 18% e. 16%

Q: Beige Inc. plans to issue preferred stock that pays a dividend equal to $11.52 per share and sells for $120 per share to raise funds to support future growth. It will cost 4 percent, or $4.80 per share, to issue the new preferred stock, which means that Beige will net $115.20 per share. What is the cost of preferred stock Beige should use when computing its weighted average cost of capital (WACC)? a. 14.0% b. 10.4% c. 13.6% d. 9.6% e. 10.0%

Q: Rollins Corporation is constructing its marginal cost of capital (MCC) schedule. Its target capital structure is 30 percent debt, 20 percent preferred stock, and 50 percent common equity. Its bonds have a 12 percent coupon rate of interest, semiannual interest payments, a current maturity of 20 years, and a market value equal to their par value of $1,000. The firm's marginal tax rate is 40 percent. What is Rollins' after-tax cost of debt? a. 8.4% b. 7.2% c. 4.8% d. 12.0% e. 3.6%

Q: SW Inc.'s preferred stock, which pays a $5.25 dividend each year, currently sells for $62.50. The company's marginal tax rate is 40 percent. When it issues preferred stock, SW normally incurs flotation costs equal to 8 percent. What is the cost of preferred stock, rps, that should be included in the computation of the SW Inc.'s weighted average cost of capital (WACC)? a. 7.73% b. 9.07% c. 8.40% d. 9.13% e. 7.78%

Q: Diggin Tools plans to issue new preferred stock, which has a market value of $85 per share. Holders of the stock will receive an annual dividend equal to $9.35. The flotation costs associated with the new issue were 6 percent and Diggin's marginal tax rate is 30 percent. What Diggin's component cost of preferred stock, rps? a. 17.00% b. 11.66% c. 10.38% d. 11.70% e. 11.00%

Q: Bouchard Company's stock sells for $20 per share, its last dividend (D0) was $1.00, its growth rate is a constant 6 percent, and the company must pay flotation cost equal to 20 percent when it issues new common stock. What is Bouchard's cost of issuing new common stock? a. 11.00% b. 12.25% c. 12.63% d. 11.30% e. 11.56%

Q: Which of the following is a major assumption that is embedded in the capital asset pricing model (CAPM), which is often used to estimate the cost of retained earnings, rs? a. All investors are well diversified. b. The firm's dividends and earnings grow at a constant rate far into the future. c. The firm's cost of equity and its cost of debt are always equal. d. The firm's cost of retained earnings must be less than its cost of preferred stock for the CAPM to provide a reasonable estimate for rs. e. Investors primarily purchase stocks with beta coefficients equal to zero.

Q: Which of the following statements is correct about using the capital asset pricing model (CAPM) to determine a firm's component costs of capital? a. The capital asset pricing model (CAPM) gives a better estimate than the discounted cash flow (DCF) approach of a firm's cost of retained earnings. b. The capital asset pricing model (CAPM) approach is typically used to estimate the flotation costs associated with issuing new common equity. c. The beta coefficient used in the capital asset pricing model (CAPM) is equal to the growth rate used in the discounted cash flow (DCF) method. d. The capital asset pricing model (CAPM) and the discounted cash flow (DCF) approach provide the same estimate for the firm's cost of retained earnings, rs. e. The capital asset pricing model (CAPM) assumes investors are well diversified, whereas the discounted cash flow (DCF) approach assumes the firm grows at a constant growth rate.

Q: Which of the following statements concerning the effect of taxes on a firm's cost of capital is correct? a. All else equal, an increase in the corporate tax rate will result in a decrease in the firm's weighted average cost of capital. b. For a particular firm, the before-tax cost of debt is less than the after-tax cost of debt because the firm must pay taxes on the interest its bondholders receive. c. A firm's after-tax cost of debt is always greater than its cost of retained earnings. d. Because preferred stock dividends are tax deductible to the firm, its cost of preferred stock is greater than its before-tax cost of debt. e. All else equal, a firm's cost of retained earnings is less than its cost of new common equity because any earnings retained by the firm are not double taxed (i.e., taxed twice) like the dividends that are paid to new common stockholders.

Q: Which of the following mathematical expressions is used to calculate the after-tax cost of debt, rdT? a. rdT = Firm's internal rate of return Tax payments b. rdT = Firm's internal rate of return Tax savings c. rdT = Bondholders' required rate of return (YTM) Tax savings d. rdT = Firm's internal rate of return Dividend payments e. rdT = Bondholders' required rate of return (YTM) Interest payments

Q: Which of the following statements is true about the flotation costs that are incurred when a firm issues new securities to raise funds? a. The higher the flotation costs associated with a preferred stock issue, the lower the firm's cost of preferred stock, rps. b. Flotation costs should be added to the per share price of a preferred stock issue to compute the cost of preferred stock, rps. c. Floatation costs should be added to the before-tax weighted average cost of capital to determine the firm's overall net weighted average cost of capital after taxes. d. When it incurs flotation costs, the firm normally receives a higher amount of net proceeds from a security issue than when there are no flotation costs. e. Floatation costs increase the cost of using funds; e.g., the cost of issuing new common stock is greater than the cost of retained earnings because the firm must pay flotation costs to issue new equity.

Q: Which of the following is the correct relationship between different capital components of a firm? rd = before-tax cost of debt; rs = cost of retained earnings; re = cost of new common equity a. rs < re b. rd = rs c. rs = re d. rs < rd e. re = re + rd

Q: According to the bond-yield-plus-risk-premium approach, a firm's cost of retained earnings, rs, can be estimated by adding a risk premium of 3 to 5 percentage points to: a. its cost of preferred stock, rps. b. the risk free rate of return. c. its before-tax interest cost of debt, rs. d. its return on equity (ROE). e. its after-tax interest cost of debt, rsT.

Q: The annual growth of Omega Inc's operations fluctuates substantially. As a result, using the dividend discount model (DDM) to estimate Omega's cost of retained earnings, rs, is difficult because: a. the stock's dividend yield is extremely difficult to estimate. b. its growth rate (g) is not stable, which makes it difficult to estimate. c. the market price of its common stock is very volatile. d. the firm's growth rate might be negative for an extended period of time. e. its net income is difficult to compute.

Q: Under normal circumstances, the weighted average cost of capital (WACC) is used as the firm's required rate of return because: a. as long as the firm's investments earn returns greater than its WACC, the value of the firm will not decrease. b. any returns less than the WACC will cover the fixed costs associated with the capital and provide excess returns to the firm's stockholders. c. it is the average of all the interest rates on the firm's existing debt. d. it is an indication of the returns the firm expects to earn in the future from investing in capital budgeting projects. e. it represents the average return the firm currently earns on the funds it has invested in assets.

Q: The before-tax cost of debt, rd, is the same as the: a. yield to maturity (YTM) associated with the firm's bonds. b. dividend yield associated with the firm's common stock. c. average coupon rate on the firm's bonds. d. return on equity if the firm has no preferred stock. e. the firm's marginal tax rate.

Q: Quantification of risk is difficult, and there are different types of risks, such as stand-alone risk, market risk, and political risk, associated with capital budgeting projects. Sensitivity analysis is a good technique to use when measuring market risk, but not when measuring stand-alone risk. a. True b. False

Q: If a capital budgeting project has very uncertain cash flows, the Monte Carlo simulation technique can be used to measure its net present value (NPV) for a worst-case scenario, a best-case scenario, and a base-case scenario. a. True b. False

Q: According to the capital asset pricing model (CAPM), a capital budgeting project that has a beta equal to zero should be evaluated using a required rate of return equal to the risk-free rate. a. True b. False

Q: A firm that is considering purchasing a capital budgeting project with a beta coefficient greater than the firm's current beta coefficient should evaluate the project using a risk-adjusted required rate of return that is greater than the firm's existing (average) required rate of return. a. True b. False

Q: A major problem with Monte Carlo simulation analysis is that while the analysis provides insights into the riskiness of a project, it does not lead to a clear-cut accept/reject decision. a. True b. False

Q: A key difference between a replacement project analysis and an expansion project analysis is that the net present value (NPV) technique that is used to evaluate capital budgeting projects should only be used to evaluate expansion projects, whereas either the NPV technique or the internal rate of return (IRR) technique can be used to evaluate replacement projects. a. True b. False

Q: A sunk cost is a cash outlay that has already been incurred. But, it is a cost that can be recovered if a capital budgeting project is purchased. Consequently, these sunk costs are extremely important in capital budgeting analyses. a. True b. False

Q: Because stockholders are very concerned with the bottom-line net income that the firm generates, capital budgeting decisions should be based on the accounting income a project generates. a. True b. False

Q: A major difference between capital budgeting for domestic operations and foreign operations is that: a. cash flow estimation is easier (less complex) for foreign operations. b. repatriation of earnings does not occur in foreign operations of multinational firms that are headquartered in the United States. c. estimating cash flows generated from foreign operations is more complex due to fluctuating exchange rates. d. foreign operations are not taxed by both the home country and the host country. e. foreign operations rarely are not as risky as domestic operations.

Q: Investment in foreign subsidiaries is less risky when: a. laws in the host country that apply to repatriate earnings are complex. b. the host country has higher tax rates. c. the host country is politically unstable. d. exchange rates are volatile. e. the subsidiaries are geographically (globally) diversified.

Q: Multinational companies can reduce the chance of a loss from expropriation by: a. increasing the required rate of return a foreign subsidiary is expected to earn. b. establishing foreign subsidiaries in countries that have restrictive policies on repatriation of earnings. c. financing the foreign subsidiary using fund raised in the host country. d. obtaining insurance against economic losses associated with expropriation. e. investing all the funds in a single foreign subsidiary.

Q: The process of sending cash from a foreign subsidiary back to the parent company is known as _____. a. net present value analysis b. political exchange c. international earnings shifts d. capital allocation e. repatriation of earnings

Q: _____ risk is the uncertainty associated with the price at which the currency from one country can be converted into the currency of another country. a. Pure play b. Political c. Money d. Exchange rate e. International

Q: Allmax is concerned that its subsidiary in Venezuela could be expropriated (seized) by the host government without compensation within the next few years. The type of risk Allmax faces with its Venezuelan subsidiary is termed ______ risk. a. pure play b. political c. international beta coefficient d. foreign exchange e. global business

Q: Carolina Insurance Company is considering the purchase of a fire insurance company. The fire insurance company has a beta of 2.5. If the risk-free rate is 8 percent and the market risk premium is 6 percent, the required rate of return that should be used to evaluate the insurance company is _____. a. 13% b. 23% c. 18% d. 11% e. 14%

Q: Using the capital asset pricing model (CAPM), Sun State determined that the required rate of return for a capital budgeting project it is evaluating is equal to 18 percent. If U.S. Treasury bonds yield 7 percent and the market risk premium is 5 percent, what is the project's beta coefficient? a. 5.50 b. 2.20 c. 5.00 d. 12.50 e. 0.45

Q: If the risk-free rate is 6 percent, the return on an average stock is 10 percent, and the beta of a capital budgeting project is 1.50, the project's required rate of return from the project is _____. a. 12% b. 24% c. 4% d. 19% e. 21%

Q: Klott Company used scenario analysis to evaluate a capital budgeting project. The analysis generated a net present value (NPV) equal to $10,500 and a standard deviation (σ) equal to $12,083. The project's coefficient of variation (CVNPV) is _____. a. 0.25 b. 13.90 c. 10.50 d. 1.15 e. 0.87

Q: Chovita Sports Company is evaluating a project that has lower-than-average risk. When evaluating projects that have different risks than its existing assets, Chovita normally adjusts its average required rate of return, which is 12 percent, by 2 percent. What required rate of return should Chovita use to compute the net present value (NPV) of the project it is currently evaluating? a. 14% b. 12% c. 6% d. 10% e. 24%

Q: Ziker Golf Company is evaluating a capital budgeting project that has a higher risk than the average risk of its existing assets. When evaluating projects that are riskier than average, Ziker normally adjusts its required rate of return by 4 percent. Ziker requires a 12 percent return on average-risk projects. What required rate of return should Ziker use to compute the net present value (NPV) of the risky project it is currently evaluating? a. 8% b. 12% c. 16% d. 10% e. 48%

Q: Which of the following statements is correct? a. Capital budgeting projects with fairly risky cash flows should be evaluated using relatively high discount rates (required rates of return). b. If managers want to maximize the firm's stock value, they should not be concerned with risk when making capital budgeting decisions. c. If a firm evaluates all capital budgeting projects using its existing required rate of return, its overall risk, as measured by its beta coefficient, probably will decline over time. d. If a firm has a beta coefficient that is less than 1.0, its existing required rate of return will be negatively correlated with the returns on most of the capital budgeting projects it evaluates in the future. e. A firm should use a different approach to estimate the riskiness of mutually exclusive projects than it uses to estimate the riskiness of independent projects.

Q: Suppose a firm's senior management is careful to make decisions that contribute to the goal of wealth maximization. If our basic assumptions about the relationship between risk and return are valid, which of the following statements is correct? a. If the beta coefficient of a capital budgeting project is greater than the firm's beta coefficient, the required rate of return used to evaluate the project should be less than the firm's existing required rate of return. b. If the beta coefficient of a capital budgeting project is less than the firm's beta coefficient, the required rate of return used to evaluate the project should be greater than the firm's existing required rate of return. c. If the beta coefficient of a capital budgeting project is greater than the firm's existing beta coefficient, the firm's beta coefficient will decrease if the project is purchased. d. If the beta coefficient of a capital budgeting project is greater than the firm's existing beta coefficient, the firm's required rate of return will increase if the project is purchased. e. If the beta coefficient of a capital budgeting project is greater than the firm's existing beta coefficient, the firm should use required rate of return that is based on its existing beta coefficient to evaluate the project.

Q: Which of the following methods involves calculating an average of the beta coefficients of numerous firms that are in the same (or a quite similar) line of business and then using that average beta coefficient to determine the appropriate required rate of return for a new capital budgeting project? a. Sensitivity analysis method b. Pure play method c. Accounting beta method d. Risk-adjusted method e. Net present value (NPV) method

Q: Monte Carlo simulation: a. can be used to estimate a project's market risk, but cannot be used to determine its net present value (NPV). b. uses the probability distributions of variables as inputs to estimate the project's net present value (NPV). c. produces an expected net present value (NPV), an internal rate of return (IRR), and a measure of the projects risk for different scenarios. d. gives an exact outcome for a capital budgeting analysis. e. calculates net present value (NPV) for a change in one key variable.

Q: Which of the following statements is correct concerning various techniques used for assessing a capital budgeting project's stand-alone risk? a. Sensitivity analysis fails to consider the range of likely values for the key input variables that are used to evaluate a capital budgeting project. b. When using sensitivity analysis, the sensitivity of input variables can be compared by graphing their relationships with such measures as net present value (NPV) and internal rate of return (IRR). When comparing two of the variables, the variable that has the graph with the steeper line (slope) is considered less risky than the graph with the flatter line. c. The primary advantage of using simulation analysis to evaluate a capital budgeting project is that it provides an accurate point (single) estimate of the project's net present value (NPV). d. Compared to scenario analysis, one important benefit of using simulation analysis to evaluate a capital budgeting project is that once the analysis is complete, simulation provides a clear accept/reject decision rule. e. When using simulation analysis to evaluate a capital budgeting project, only a few discrete alternative scenarios are included.