raising capital for the firm

1. 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.

Question 2. 2. Beta is estimated as the slope of a regression line fit to pairs of periodic returns, (rx, ry), where: (Points : 1)

rx is the return for a market index such as the S&P 500 Index. rx is the return for the stock being analyzed—for example, IBM’s return if we are estimating IBM’s beta. the slope measures the average return for the market portfolio for each percentage change in the value of the security of interest. ry is the return for the market index such as the S&P 500 Index.

Question 3. 3. In the Capital Asset Pricing Model, the market risk premium is best approximated by: (Points : 1)

the most recent one-year return on the S&P 500 Index (or another market index). the long-term historic return on a stock market index such as the S&P 500 (or another market index). the long-term average spread of the S&P 500 (or another market index) over the yield of long-term government bonds. the return of the S&P 500 (or another market index) over the current yield of long-term government bonds.

Question 4. 4. Which of the following statements regarding the cost of equity is true? (Points : 1)

It can be estimated in three different ways. It is always estimated using the present value of future dividends approach. It is estimated by solving for the discount rate for a perpetuity. It is generally lower than the cost of debt because equity holders are paid after taxes are paid.

Question 5. 5. In the Capital Asset Pricing Model, the market risk premium can be thought of as: (Points : 1)

the return investors expect to earn for each unit of risk as measured by beta. the risk premium that any asset must pay above the risk-free rate. the expected return on the market portfolio (or a broad market index). a measure of risk of an asset.

Question 6. 6. The financing mix reflected in the WACC should: (Points : 1)

reflect the desired mix and not necessarily the mix being used to finance a specific project. vary from project to project, depending on how they are financed. always reflect the firm’s current capital structure. None of these answers is correct.

Question 7. 7. 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.

Question 8. 8. Chapter 9 discusses three different types of returns. Identify the item in the list below that is NOT one of those three types of returns. (Points : 1)

the actual rate of return the expected rate of return the risk-free rate of return the required rate of return

Question 9. 9. If an investor purchases a share of stock for $300, collects a dividend during the year equal to $35 a share, and sells the stock at the end of the year for $289, what is the investor’s return for the year? (Points : 1)

12.11% 8.30% 8.00% 15.33%

Question 10. 10. 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%