1.The term capital structure weights refer to the proportions of a firm's:

A.market value financed with debt, common stock, and preferred stock.

B.fixed assets invested in equipment, buildings, and land.

C.book value of assets versus the book value of debt.

D.assets invested in short-term versus long-term assets.

2.The pure play approach:

A.applies the firm's weighted average cost of capital (WACC) to only the incremental cash flows of a proposed project.

B.assigns a WACC to a project dependent upon the division of the firm which controls the project.

C.utilizes the WACC of Firm B to determine the cost of capital for a project under consideration by Firm A.

D.randomly selects a WACC based purely on management's opinion of the risk involved.

3.Flotation costs refer to the:

A.initial costs incurred on day one of a new project.

B.interest rate imposed on the firm's debt.

C.required rate of return which is necessary for a project to be accepted.

D.costs incurred by a firm when new issues of securities are sold.

4.Which one of the following primarily determines the cost of capital for a project?

A.current debt-equity ratio of the firm

B.manner in which the funds will be utilized

C.source of the funds for the project

D.expected internal rate of return on the project

5.The overall cost of capital for a firm:

A.should be used as the required rate of return for any new projects undertaken by the firm.

B.reflects both the cost of debt financing and the cost of equity financing.

C.is unaffected by the firm's capital structure.

D.remains constant over time.

6.The cost of equity is affected by:

I. the growth rate of the firm.

II. the market risk premium.

III. the risk level of the firm.

IV. dividend increases or decreases.

A.I and III only

B.II and IV only

C.I, II, and III only

D.I, II, III, and IV

7.Which of the following represent weaknesses in the dividend growth model as a means of determining a firm's cost of equity financing for an investment?

I. the model fails to specifically address the risk level of the investment

II. the model can only be used by dividend-paying firms

III. the model is highly dependent upon the accuracy of the beta assigned to the firm

IV. the model is highly sensitive to the growth rate of the firm

A.I and II only

B.I and III only

C.II and III only

D I, II, and IV only

8.The primary advantage of the dividend growth model is its:

A.use of a growth rate.

B.relationship to the future dividends of a firm.

C.use of the current stock price.

D.simplicity.

9.The security market line approach:

A.provides an actual cost of equity because the risk level of the firm is known with certainty.

B.relies on the past as a predictor of the future.

D.is less applicable to business firms than the dividend growth model.

E.considers the projected growth rate of the firm.

10.Toasty Feet makes fur-lined boots for winter wear. The firm has a beta of 1.08 and just paid an annual dividend of $1.50 per share. Based on the security market line approach, which one of the following will increase the firm's cost of equity? Assume a constant market rate of return.

A.a decrease in the risk-free rate of return

C.a decrease in the firm's rate of growth

D.a decrease in the dividend payout ratio

E.a decrease in the firm's beta

11.The risk premium for a firm is based on the:

A.firm's dividend history and growth rate.

B.firm's level of risk relative to the market and the firm's rate of growth.

C.market risk premium and the firm's level of risk relative to the market.

E.market risk premium and the risk-free rate of return.

12.Which one of the following correctly represents a firm's after-tax cost of debt?

A.current yield x (1 - tax rate)

B.current yield x tax rate

C.coupon rate x (1 - tax rate)

D.yield to maturity x (1 - tax rate)

13.A firm's cost of debt:

A.increases as the tax rate increases.

B.increases when the firm's bond rating increases.

C.is the interest rate the firm must pay on new debt.

E.is inversely related to market rates.

14.The cost of preferred stock is dependent upon:

A.the dividend amount and the market risk premium.

B.the dividend amount and the market price of the stock.

C.the market risk premium and the firm's level of risk relative to the market.

D.the market price of the stock and the risk level of the firm relative to the market.

15.If you are using the perpetuity formula, you are computing the cost of:

A.preferred stock.

B.debt on a pre-tax basis.

C.debt on an after-tax basis.

D.either common or preferred stock.