ScienceEconomicsFINAN 450 Ch 12
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FINAN 450 Ch 12

Destiny Jones avatar Destiny Jones
25 July 2022
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question
The weighted average cost of capital is defined as the weighted average of a firm's:
answer
cost of equity, cost of preferred, and its aftertax cost of debt.
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(T/F) An increase in the market value of preferred stock will increase a firm's weighted average cost of capital.
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False
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(T/F) The cost of preferred stock is unaffected by the issuer's tax rate.
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True
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(T/F) Preferred stock is generally the cheapest source of capital for a firm.
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False
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(T/F) The cost of preferred stock remains constant from year to year.
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False
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(T/F) Preferred stock is valued using the capital asset pricing model.
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False
question
What represents the minimum rate of return a firm must earn on its assets if it is to maintain the current value of its securities?
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Weighted average cost of capital
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An increase in a levered firm's tax rate will:
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decrease the firm's cost of capital.
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What is the cost of debt
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the required return on a company's debt
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How do you calculate the cost of preferred stock
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perpetuity
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what to remember about WACC
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everything is a market value, not a book value
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factors that influence a company's WACC
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market conditions the firm's capital structure and dividend policy the firm's investment policy
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Pure play approach
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look at other company's betas to calculate CAPM
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Subjective approach
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look at the project's risk in comparison to the firm's risk
question
What are the two approaches for calculating cost of equity?
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dividend growth model and SML