FINC 332 Exam 3 | UPDATED Questions with 100% Verified Answers
Question:
Flotation costs
Answer:
-refer to the fees a firm pays to an investment bank to help
them issue new common stock
- Firms will never incur these costs when raising capital for
retained earnings
Question:
Expected rate of return
Answer:
Cash inflow / initial investment + flotation cost
Question:
True
Answer:
-new project has higher risk level than the firm's current
overall risk, the firm's investors will require a higher rate or
return than they would on the firm's average project.
- firm will need to use a discount rate that is greater than the
cost of capital to evaluate the project.
- If expected return is lower than discount rate, project should
be rejected, even if the project's expected return is greater
than the firm's overall required rate of return
Question:
Short-term
Answer:
this type of debt should not be included in the calculation of a
firm's WACC, since it generally does not represent a
permanent source of financing for most U.S. companies
, Question:
WACC
Answer:
This is the return that providers of financial capital require to
induce them to provide capital to a firm, and the associated
cost to the firm for securing these funds
Question:
Own-bond-yield-plus-judgmental-risk-premium method
Answer:
of the three major methods used to generate an estimate of a
firm's cost of common equity, this method is generally used
by non-public-traded companies
Question:
Risk aversion
Answer:
this characteristic of investors determines the market risk
premium, a firm's cost of common equity, and its WACC
Question:
Factors that affect the WACC equation: firm can control
Answer:
-the firm's capital structure
-the firm's dividend payout ratio
Question:
Factors that affect the WACC equation: firm CANNOT
control
Answer:
-tax rates
-interest rates in the economy
Question:
Flotation costs
Answer:
-refer to the fees a firm pays to an investment bank to help
them issue new common stock
- Firms will never incur these costs when raising capital for
retained earnings
Question:
Expected rate of return
Answer:
Cash inflow / initial investment + flotation cost
Question:
True
Answer:
-new project has higher risk level than the firm's current
overall risk, the firm's investors will require a higher rate or
return than they would on the firm's average project.
- firm will need to use a discount rate that is greater than the
cost of capital to evaluate the project.
- If expected return is lower than discount rate, project should
be rejected, even if the project's expected return is greater
than the firm's overall required rate of return
Question:
Short-term
Answer:
this type of debt should not be included in the calculation of a
firm's WACC, since it generally does not represent a
permanent source of financing for most U.S. companies
, Question:
WACC
Answer:
This is the return that providers of financial capital require to
induce them to provide capital to a firm, and the associated
cost to the firm for securing these funds
Question:
Own-bond-yield-plus-judgmental-risk-premium method
Answer:
of the three major methods used to generate an estimate of a
firm's cost of common equity, this method is generally used
by non-public-traded companies
Question:
Risk aversion
Answer:
this characteristic of investors determines the market risk
premium, a firm's cost of common equity, and its WACC
Question:
Factors that affect the WACC equation: firm can control
Answer:
-the firm's capital structure
-the firm's dividend payout ratio
Question:
Factors that affect the WACC equation: firm CANNOT
control
Answer:
-tax rates
-interest rates in the economy
