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    Chapter 14 Quiz

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    Umidjon Yusupov
    A group of individuals purchased all outstanding shares of common stock in DL Smith, Inc. This return required by these individuals on their investment is called the cost of equity. Phil's restaurant and Theresa's deli are both considering expanding their food offerings at a local beach. Phil's current WACC is 14% while Theresa's is 10%. The expansion project has a positive NPV at 10% but negative NPV at 14%, so Theresa's should expand but Phil's should not.

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    Chapter 14 Quiz

    Uploaded by

    Umidjon Yusupov
    2K views21 pages
    A group of individuals purchased all outstanding shares of common stock in DL Smith, Inc. This return required by these individuals on their investment is called the cost of equity. Phil's restaurant and Theresa's deli are both considering expanding their food offerings at a local beach. Phil's current WACC is 14% while Theresa's is 10%. The expansion project has a positive NPV at 10% but negative NPV at 14%, so Theresa's should expand but Phil's should not.

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    A group of individuals purchased all outstanding shares of common stock in DL Smith, Inc. This return required by these individuals on their investment is called the cost of equity. Phil's restaurant and Theresa's deli are both considering expanding their food offerings at a local beach. Phil's current WACC is 14% while Theresa's is 10%. The expansion project has a positive NPV at 10% but negative NPV at 14%, so Theresa's should expand but Phil's should not.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    2K views21 pages

    Chapter 14 Quiz

    Uploaded by

    Umidjon Yusupov
    A group of individuals purchased all outstanding shares of common stock in DL Smith, Inc. This return required by these individuals on their investment is called the cost of equity. Phil's restaurant and Theresa's deli are both considering expanding their food offerings at a local beach. Phil's current WACC is 14% while Theresa's is 10%. The expansion project has a positive NPV at 10% but negative NPV at 14%, so Theresa's should expand but Phil's should not.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
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    AgroupofindividualsgottogetherandpurchasedalloftheoutstandingsharesofcommonstockofDLSmith,Inc.Whatistheretu Answer a. dividendyield b. costofequity c. capitalgainsyield d. costofcapital e. incomereturn TextileMillsborrowsmoneyatarateof13.5percent.Thisinterestrateisreferredtoasthe: Answer a. compoundrate b. currentyield c. costofdebt d. capitalgainsyield e.

    costofcapital

    Theaverageofafirm'scostofequityandaftertaxcostofdebtthatisweightedbasedonthefirm'scapitalstructureiscalledthe: Answer a. rewardtoriskratio b. weightedcapitalgainsrate c. structuredcostofcapital d. subjectivecostofcapital e. weightedaveragecostofcapital

    Thecostofequityforafirm: Answer a. tendstoremainstaticforfirmswithincreasinglevelsofrisk b. increasesastheunsystematicriskofthefirmincreases c. ignoresthefirm'sriskswhenthatcostisbasedonthedividendgrowthmodel d. equalstherisk-freerateplusthemarketriskpremium e. equalsthefirm'spretaxweightedaveragecostofcapital

    Thedividendgrowthmodelcanbeusedtocomputethecostofequityforafirminwhichofthefollowingsituations? I. firms that have a 100 percent retention ratio II. firms that pay a constant dividend III. firms that pay an increasing dividend IV. firms that pay a decreasing dividend Answer a. IandIIonly b. IandIIIonly c. IIandIIIonly d. I,IIandIIIonly e. II,IIIandIVonly

    Thecostofpreferredstock: Answer a. isequaltothedividendyield b. isequaltotheyieldtomaturity c. ishighlydependentonthedividendgrowthrate d. isindependentofthestock'sprice e. decreaseswhentaxratesincrease The weighted average cost of capital for a firm may be dependent upon the firm's: I. rate of growth. II. debt-equity ratio. III. preferred dividend payment. IV. retention ratio. Answer a. IandIIIonly b. IIandIVonly c. I,IIandIVonly d. I,IIIandIVonly e. I,II,IIIandIV

    IfafirmusesitsWACCasthediscountrateforalloftheprojectsitundertakesthenthefirmwilltendto: I. reject some positive net present value projects. II. accept some negative net present value projects. III. favor high risk projects over low risk projects. IV. increase its overall level of risk over time. Answer a. IandIIIonly b. IIIandIVonly c. I,IIandIIIonly d. I,IIandIVonly e. I,II,IIIandIV

    Thediscountrateassignedtoanindividualprojectshouldbebasedon: Answer a. thefirm'sweightedaveragecostofcapital b. theactualsourcesoffundingusedfortheproject c. anaverageofthefirm'soverallcostofcapitalforthepastfiveyears d. thecurrentriskleveloftheoverallfirm e. therisksassociatedwiththeuseofthefundsrequiredbytheproject

    Whichoneofthefollowingstatementsiscorrect? Answer a. Firmsshouldacceptlowriskprojectspriortofundinghighriskprojects b. Makingsubjectiveadjustmentstoafirm'sWACCwhendeterminingprojectdiscountratesunfairlypunishe c. Aprojectthatisunacceptabletodaymightbeacceptabletomorrowgivenachangeinmarketreturns d. Thepureplaymethodismostfrequentlyusedforprojectsinvolvingtheexpansionofafirm'scurrentopera e. Firmsthatelecttousethepureplaymethodfordeterminingadiscountrateforaprojectcannotsubjectiv

    Phil'sisasit-downrestaurantthatspecializesinhome-cookedmeals.Theresa'sisawalk-indelithatspecializesinspecialtysoupsa Answer a. Phil'sonly b. Theresa'sonly c. bothPhil'sandTheresa's d. neitherPhil'snorTheresa's e. cannotbedeterminedfromtheinformationprovided

    ommonstockofDLSmith,Inc.Whatisthereturnthattheseindividualsrequireonthisinvestmentcalled?

    donthefirm'scapitalstructureiscalledthe:

    whichofthefollowingsituations?

    thefirmwilltendto:

    miningprojectdiscountratesunfairlypunisheslow-riskdivisionswithinafirm morrowgivenachangeinmarketreturns volvingtheexpansionofafirm'scurrentoperations adiscountrateforaprojectcannotsubjectivelyadjustthepureplayrate

    walk-indelithatspecializesinspecialtysoupsandsandwiches.Bothfirmsarecurrentlyconsideringexpandingtheiroperationsduringthesummermon

    dingtheiroperationsduringthesummermonthsbyofferingpre-wrappeddonuts,sandwiches,andwrapsatalocalbeach.Phil'scurrentlyhasaWACC

    psatalocalbeach.Phil'scurrentlyhasaWACCof14percentwhileTheresa'sWACCis10percent.Theexpansionprojecthasaprojectednetpresentva

    pansionprojecthasaprojectednetpresentvalueof$12,600ata10percentdiscountrateandanetpresentvalueof-$2,080ata14percentdiscount

    entvalueof-$2,080ata14percentdiscountrate.Whichfirmorfirmsshouldexpandandofferfoodatthelocalbeachduringthesummermonths?

    helocalbeachduringthesummermonths?

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