Reading 30: Cost of Capital—Foundational Topics

The weighted average cost of capital (WACC) is best described as the:

Which component of the WACC is typically adjusted for taxes?

A company's target capital structure consists of 40 percent debt and 60 percent equity. The after-tax cost of debt is 5 percent, and the cost of equity is 12 percent. The WACC is closest to:

When calculating WACC, the weights should be based on the:

The cost of debt capital is best estimated by the:

A firm has a pre-tax cost of debt of 8 percent and a marginal tax rate of 30 percent. The after-tax cost of debt is closest to:

If a company's debt is not publicly traded, the analyst should most likely estimate the cost of debt using:

The cost of preferred stock is equal to the preferred dividend divided by the:

A company has preferred stock selling for 50 dollars per share that pays an annual dividend of 4 dollars. The cost of preferred stock is:

When calculating the cost of preferred stock, an analyst should:

The opportunity cost of equity capital is best described as the:

Using the Capital Asset Pricing Model (CAPM), the cost of equity is calculated as:

A stock has a beta of 1.2. The risk-free rate is 3 percent and the expected return on the market is 10 percent. The cost of equity using CAPM is closest to:

Which approach calculates the cost of equity by adding a risk premium to the yield on the firm's long-term debt?

If a company's before-tax cost of debt is 6 percent and the typical risk premium added is 4 percent, the estimated cost of equity using the bond yield plus risk premium approach is:

A stock's beta is a measure of its:

To estimate beta for a nonpublic company, an analyst should use the:

In the pure-play method, the first step is to calculate the comparable company's:

The formula to unlever a beta (calculate asset beta) is:

A comparable company has an equity beta of 1.5, a debt-to-equity ratio of 0.5, and a tax rate of 30 percent. The asset beta is closest to:

Once the asset beta is determined, the next step in estimating the beta for a target company is to:

An asset beta of 1.2 needs to be relevered for a target company with a debt-to-equity ratio of 0.8 and a tax rate of 25 percent. The target equity beta is closest to:

Flotation costs are fees paid to:

The correct method to account for flotation costs in capital budgeting analysis is to:

Adjusting the cost of equity to account for flotation costs is considered incorrect because:

A project requires a 400,000 dollar equity investment. Flotation costs are 5 percent. The correct adjustment to the initial outlay is:

Which of the following creates a tax shield for a company?

If a firm uses its current WACC to evaluate a project that is riskier than the firm's average project, it will likely:

The marginal cost of capital (MCC) generally:

When calculating WACC, if the target capital structure is not explicitly known, an analyst may estimate weights using:

In the CAPM, the market risk premium is defined as:

A bond yield plus risk premium approach uses a risk premium that typically ranges from:

The beta of a stock measures its:

An analyst is calculating the WACC for a firm with 100 million EUR in debt trading at 95 percent of par and 200 million EUR in equity (market value). The total market value of the firm's capital is:

If a firm has a beta of 0.8, a risk-free rate of 4 percent, and a market risk premium of 6 percent, the cost of equity is:

Generally, the cost of equity is:

When calculating the WACC, interest tax savings are:

Matrix pricing is primarily used when:

The unlevered beta represents the risk of the firm's:

A stock's beta is estimated using a regression. The slope of the regression line represents:

Adjusted beta refers to the tendency of betas to:

Which of the following is NOT a component of the WACC calculation?

If a company has a debt-to-equity ratio of 0.6, the weight of debt in the WACC calculation is:

If flotation costs are treated correctly, the estimated NPV of a project will be:

In the context of WACC, as the corporate tax rate increases, the cost of debt:

The 'pure-play' company selected for beta estimation should be:

If the risk-free rate increases, assuming all else holds constant, the cost of equity calculated using CAPM will:

When using the dividend discount model (DDM) to estimate the cost of equity, the cost is equal to:

A firm has a beta of 1.5. The market return is 12 percent and the risk-free rate is 2 percent. The firm's cost of equity is:

The after-tax cost of debt is used in the WACC calculation because: