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FIN 701 Exam 3 Module 5 Questions with Correct Answers
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D) both the returns currently required by its debtholders and stockholders. - Answer-1) A company's current cost of capital is based on: E) A reduction in the risk-free rate - Answer-2) All else constant, which one of the following will increase a company's cost of equity if the company computes...

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  • August 23, 2024
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  • 2024/2025
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  • fin 701 exam 3 module 5 questions with correct ans
  • d both the returns currently required by its debt

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FIN 701 Exam 3 Module 5 Questions with
Correct Answers
D) both the returns currently required by its debtholders and stockholders. - Answer-1)
A company's current cost of capital is based on:

E) A reduction in the risk-free rate - Answer-2) All else constant, which one of the
following will increase a company's cost of equity if the company computes that cost
using the security market line approach? Assume fim currently pays an annual dividend
of $1 a share and has a beta of 1.2

C) is dependent upon a reliable estimate of the market risk premium. - Answer-3)
Assume Russo's has a debt-equity ratio of 4 and uses the capital asset pricing model
(CAPM) to determine its cost of equity. As a result, the company's cost of equity:

B) Cost of equity - Answer-4) A group of individuals got together and purchased all of
the outstanding shares of common stock of DL Smith Inc. What is the return that these
individuals require on this investment called?

C) cost of debt. - Answer-5) Textile Mills borrows money at a rate of 8.7 percent. This
interest rate is referred to as the: A) compound rate B) current yield. C) cost of debt. D)
capital gains yield. E) cost of capital.

B) A decrease in the company's tax rate - Answer-6) Which one of these will increase a
company's aftertax cost of debt? A) A decrease in the company's debt-equity ratio B) A
decrease in the company's tax rate C) An increase in the credit rating of the company's
bonds D) An increase in the company's beta E) A decrease in the market rate of interest

E) cost of an irregular growth common stock - Answer-7) The cost of preferred stock is
computed the same as the A) pretax cost of debt. B) rate of return on an annuity. C)
aftertax cost of debt D) rate of return on a perpetuity. E) cost of an irregular growth
common stock

C) is the return investors require on the total assets of the firm. - Answer-8) A
company's weighted average cost of capital: A) is equivalent to the aftertax cost of the
outstanding liabilities. B) should be used as the required return when analyzing any new
project. C) is the return investors require on the total assets of the firm. D) remains
constant when the debt-equity ratio changes. E) is unaffected by changes in corporate
tax rates.

E) weighted average cost of capital. - Answer-9) The average of a company's cost of
equity, cost of preferred, and aftertax cost of debt that is weighted based on the
company's capital structure is called the A) reward-to-risk ratio. B) weighted capital

, gains rate. C) structured cost of capital. D) subjective cost of capital. E) weighted
average cost of capital.

B) increase the average risk level of the company over time. - Answer-10) If a company
uses its WACC as the discount rate for all of the projects it undertakes then the
company will tend to: A) accept all positive net present value projects. B) increase the
average risk level of the company over time. C) reject all high-risk projects. D) reject all
negative net present value projects. E) favor low-risk projects over high-risk projects

C) assigns discount rates to projects based on the discretion of the senior managers of
a firm. - Answer-11) The subjective approach to project analysis: A) is used only when a
firm has an all-equity capital structure. B) uses the WACC of Firm X as the basis for the
discount rate for a project under consideration by Firm Y C) assigns discount rates to
projects based on the discretion of the senior managers of a firm. D) allows managers
to randomly adjust the discount rate assigned to a project once the project's standard
deviation has been determined E) applies a lower discount rate to projects that are
financed totally with equity as compared to those that are partially financed with debt.

B) pure play - Answer-12) When a manager develops a cost of capital for a specific
project based on the cost of capital for another firm that has a similar line of business as
the project, the manager is utilizing the ______ approach. A) subjective risk B) pure play
C) divisional cost of capital D) capital adjustment E) security market line

D) 7.83 percent - Answer-13) Chelsea Fashions is expected to pay an annual dividend
of $1.26 a share next year. The market price of the stock is $24.09 and the growth rate
is 2.6 percent. What is the cost of equity? A) 9.77 percent B) 7.91 percent C) 9.24
percent D) 7.83 percent E) 7.54 percent

D) 8.27 percent - Answer-14) Sweet Treats common stock is currently priced at $36.72
a share. The company just paid $2.18 per share as its annual dividend. The dividends
have been increasing by 2.2 percent annually and are expected to continue doing the
same. What is the cost of equity? A) 9.41 percent B) 9.51 percent C) 8.47 percent D)
8.27 percent E) 8.82 percent

A) 1.85 percent - Answer-15) Highway Express has paid annual dividends of $1.32,
$1.33, $1.38, $1.40, and $1.42 over the past five years, respectively. What is the
average dividend growth rate? A) 1.85 percent B) 2.16 percent C) 1.98 percent D) 2.47
percent E) 2.39 percent

C) 10.17 percent - Answer-16) Southern Bakeries just paid its annual dividend of $.48 a
share. The stock has a market price of $17.23 and a beta of .93. The return on the U.S.
Treasury bill is 3.1 percent and the market risk premium is 7.6 percent. What is the cost
of equity? A) 9.98 percent B) 10.04 percent C) 10.17 percent D) 10.30 percent E) 10.45
percent

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