Finance Test 5

beta of 1 The systematic risk of the market is measured by a:Multiple Choicebeta of 1.beta of 0. standard deviation of 1. standard deviation of 0. variance of 1.
portfolio weight Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?Multiple ChoicePortfolio return Portfolio weightDegree of risk Price-earnings ratio Index value
market value of the investment in each stock. The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:Multiple Choicenumber of shares owned of each stock. market price per share of each stock. market value of the investment in each stock.original amount invested in each stock. cost per share of each stock held.
Expected rate of return Which one of the following is most directly affected by the level of systematic risk in a security?Multiple ChoiceVariance of the returns Standard deviation of the returns Expected rate of returnRisk-free rate Market risk premium
total Standard deviation measures which type of risk?Multiple ChoiceTotalNon-diversifiable Unsystematic Systematic Economic
The actual expected stock return indicates the stock is currently overpriced. The common stock of Alpha Manufacturers has a beta of 1.24 and an actual expected return of 13.25 percent. The risk-free rate of return is 3.7 percent and the market rate of return is 11.78 percent. Which one of the following statements is true given this information?Multiple ChoiceThe actual expected stock return will graph above the security market line. The stock is currently underpriced. To be correctly priced according to CAPM, the stock should have an expected return of 13.56 percent. The stock has less systematic risk than the overall market. The actual expected stock return indicates the stock is currently overpriced.
portfolio Suzie owns five different bonds and twelve different stocks. Which one of the following terms most applies to her investments?Multiple ChoiceIndex PortfolioCollection Grouping Risk-free
cost of capital Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the:Multiple Choiceaverage arithmetic return. expected return. market rate of return. internal rate of return. cost of capital.
can be less than the standard deviation of the least risky security in the portfolio. The standard deviation of a portfolio:Multiple Choiceis a weighted average of the standard deviations of the individual securities held in the portfolio. can never be less than the standard deviation of the most risky security in the portfolio. must be equal to or greater than the lowest standard deviation of any single security held in the portfolio. is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. can be less than the standard deviation of the least risky security in the portfolio.
a higher return than expected for the level of risk assumed. A stock with an actual return that lies above the security market line has:Multiple Choicemore systematic risk than the overall market. more risk than that warranted by CAPM. a higher return than expected for the level of risk assumed.less systematic risk than the overall market. a return equivalent to the level of risk assumed
expected return you own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?Multiple ChoiceArithmetic return Historical return Expected returnGeometric return Required return
This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated. Which one of the following events would be included in the expected return on Sussex stock?Multiple ChoiceThe chief financial officer of Sussex unexpectedly resigned. The labor union representing Sussex’s employees unexpectedly called a strike. This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated.The price of Sussex stock suddenly declined in value because researchers accidentally discovered that one of the firm’s products can be toxic to household pets. The board of directors made an unprecedented decision to give sizeable bonuses to the firm’s internal auditors for their efforts in uncovering wasteful spending.
eliminate asset-specific risk. The primary purpose of portfolio diversification is to:Multiple Choiceincrease returns and risks. eliminate all risks. eliminate asset-specific risk.eliminate systematic risk. lower both returns and risks.
Unsystematic risk Which one of the following risks is irrelevant to a well-diversified investor?Multiple ChoiceSystematic risk Unsystematic riskMarket risk Non-diversifiable risk Systematic portion of a surprise
National decrease in consumer spending on entertainment Which one of the following is an example of unsystematic risk?Multiple ChoiceAn across the board increase in income taxes Adoption of a national sales tax Decrease in the national level of inflation An increased feeling of global prosperity National decrease in consumer spending on entertainment
Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term. Which one of the following statements related to unexpected returns is correct?Multiple ChoiceAll announcements by a firm affect that firm’s unexpected returns. Unexpected returns over time have a negative effect on the total return of a firm. Unexpected returns are relatively predictable in the short-term. Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term. Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.
The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio Which one of the following statements related to risk is correct?Multiple ChoiceThe beta of a portfolio must increase when a stock with a high standard deviation is added to the portfolio. Every portfolio that contains 25 or more securities is free of unsystematic risk. The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio.Adding five additional stocks to a diversified portfolio will lower the portfolio’s beta. Stocks that move in tandem with the overall market have zero betas.
Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero. Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?Multiple ChoiceGiven the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market. The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved. Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio. The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified.Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.
Systematic Which one of the following is a risk that applies to most securities?Multiple ChoiceUnsystematic Diversifiable SystematicAsset-specific Industry
risk premium. The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the:Multiple Choicemarket risk premium. risk premium.systematic return. total return. real rate of return.
Eliminating unsystematic risk is the responsibility of the individual investor. Which one of the following statements is correct concerning unsystematic risk?Multiple ChoiceAn investor is rewarded for assuming unsystematic risk. Eliminating unsystematic risk is the responsibility of the individual investor.Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. Beta measures the level of unsystematic risk inherent in an individual security. Standard deviation is a measure of unsystematic risk.
beta Systematic risk is measured by:Multiple Choicethe mean. beta.the geometric average. the standard deviation. the arithmetic average.
systematic risk principle The _____ tells us that the expected return on a risky asset depends only on that asset’s nondiversifiable risk.Multiple Choiceefficient markets hypothesis systematic risk principleopen markets theorem law of one price principle of diversification
Stock with a beta of 1.38 Which one of the following should earn the highest risk premium based on CAPM?Multiple ChoiceDiversified portfolio with returns similar to the overall market Stock with a beta of 1.38Stock with a beta of .74 U.S. Treasury bill Portfolio with a beta of 1.01
spreading an investment across many diverse assets will eliminate some of the total risk. The principle of diversification tells us that:Multiple Choiceconcentrating an investment in two or three large stocks will eliminate all of the unsystematic risk. concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. spreading an investment across five diverse companies will not lower the total risk. spreading an investment across many diverse assets will eliminate all of the systematic risk. spreading an investment across many diverse assets will eliminate some of the total risk.
Over time, the average unexpected return will be zero. Which one of the following statements is correct?Multiple ChoiceThe unexpected return is always negative. The expected return minus the unexpected return is equal to the total return. Over time, the average return is equal to the unexpected return. The expected return includes the surprise portion of news announcements. Over time, the average unexpected return will be zero.
beta Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?Multiple ChoiceBetaReward-to-risk ratio Risk ratio Standard deviation Price-earnings ratio
Capital asset pricing model Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security’s systematic risk?Multiple ChoiceCapital asset pricing modelTime value of money equation Unsystematic risk equation Market performance equation Expected risk formula
standard deviation; beta Total risk is measured by _____ and systematic risk is measured by _____.Multiple Choicebeta; alpha beta; standard deviation alpha; beta standard deviation; betastandard deviation; variance
risk premium The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly.Multiple Choicereal return actual return nominal return risk premiumexpected return
the risk-free rate. The intercept point of the security market line is the rate of return which corresponds to:Multiple Choicethe risk-free rate.the market rate. a return of zero. a return of 1.0 percent. the market risk premium.
I and III only Which of the following statements concerning risk are correct?I. Non-diversifiable risk is measured by beta.II. The risk premium increases as diversifiable risk increases.III. Systematic risk is another name for non-diversifiable risk.IV. Diversifiable risks are market risks you cannot avoid.Multiple ChoiceI and III onlyII and IV only I and II only III and IV only I, II, and III only
A decrease in the portfolio standard deviation Which one of the following indicates a portfolio is being effectively diversified?Multiple ChoiceAn increase in the portfolio beta A decrease in the portfolio beta An increase in the portfolio rate of return An increase in the portfolio standard deviation A decrease in the portfolio standard deviation
can be effectively eliminated by portfolio diversification. Unsystematic risk:Multiple Choicecan be effectively eliminated by portfolio diversification.is compensated for by the risk premium. is measured by beta. is measured by standard deviation. is related to the overall economy.
A firm’s sales decrease Which one of the following is the best example of a diversifiable risk?Multiple ChoiceInterest rates increase Energy costs increase Core inflation increases A firm’s sales decreaseTaxes decrease
Security market line Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?Multiple ChoiceReward-to-risk matrix Portfolio weight graph Normal distribution Security market lineMarket real returns
market risk premium and the amount of systematic risk inherent in the security. According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:Multiple Choiceamount of total risk assumed and the market risk premium. market risk premium and the amount of systematic risk inherent in the security.risk-free rate, the market rate of return, and the standard deviation of the security. beta of the security and the market rate of return. standard deviation of the security and the risk-free rate of return.
Reducing the number of stocks held in a portfolio Which one of the following is least apt to reduce the unsystematic risk of a portfolio?Multiple ChoiceReducing the number of stocks held in a portfolioAdding bonds to a stock portfolio Adding international securities into a portfolio of U.S. stocks Adding U.S. Treasury bills to a risky portfolio Adding technology stocks to a portfolio of industrial stocks
increase the average risk level of the company over time. If a company uses its WACC as the discount rate for all of the projects it undertakes then the company will tend to:Multiple Choiceaccept all positive net present value projects. increase the average risk level of the company over time.reject all high-risk projects.reject all negative net present value projects. favor low-risk projects over high-risk projects.
weighted and included in the initial cash flow. Flotation costs for a levered firm should be:Multiple Choiceignored when analyzing a project because they are a sunk cost. spread over the life of a project thereby reducing the cash flows for each year of the project.Incorrectconsidered only when two projects are mutually exclusive. weighted and included in the initial cash flow.totally ignored when internal equity funding is utilized.
rate of return on a perpetuity The cost of preferred stock is computed the same as the:Multiple Choicepretax cost of debt. rate of return on an annuity. aftertax cost of debt. rate of return on a perpetuity.cost of an irregular growth common stock.
is only as reliable as the estimated rate of growth. The dividend growth model:Multiple Choiceis only as reliable as the estimated rate of growth.can only be used if historical dividend information is available. considers the risk that future dividends may vary from their estimated values. applies only when a company is currently paying dividends. is based solely on historical dividend information.
is based on the current yield to maturity of the company’s outstanding bonds. A company’s pretax cost of debt:Multiple Choiceis based on the current yield to maturity of the company’s outstanding bonds.is equal to the coupon rate on the latest bonds issued by the company. is equivalent to the average current yield on all of a company’s outstanding bonds. is based on the original yield to maturity on the latest bonds issued by a company. has to be estimated as it cannot be directly observed in the market.
directly related to the risk level of the firm. A company’s overall cost of equity is:Multiple Choicegenerally less than its WACC given a debt-equity ratio of .5. unaffected by changes in the market risk premium. directly related to the risk level of the firm.generally less than the firm’s aftertax cost of debt. inversely related to changes in the level of inflation
A project that is unacceptable today might be acceptable tomorrow given a change in market returns Which one of the following statements is correct?Multiple ChoiceFirms should accept low-risk projects prior to funding high-risk projects. Making subjective adjustments to a company’s WACC when determining project discount rates unfairly punishes low-risk divisions within the company. A project that is unacceptable today might be acceptable tomorrow given a change in market returns.The pure play method is most frequently used for projects involving the expansion of a company’s current operations. Companies that elect to use the pure play method for determining a discount rate for a project cannot subjectively adjust the pure play rate.
Use of the funds raised Which one of the following is the primary determinant of a firm’s cost of capital?Multiple ChoiceDebt-equity ratio of any new funds raisedMarginal tax rate Pretax cost of equity Aftertax cost of equity Use of the funds raised
is the return investors require on the total assets of the firm. A company’s weighted average cost of capital:Multiple Choiceis equivalent to the aftertax cost of the outstanding liabilities. should be used as the required return when analyzing any new project. is the return investors require on the total assets of the firm.remains constant when the debt-equity ratio changes. is unaffected by changes in corporate tax rates.
assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values. Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 65 percent of the company’s overall sales. Division A is also the riskier of the two divisions. When management is deciding which of the various divisional projects should be accepted, the managers should:Multiple Choiceallocate more funds to Division A since it is the larger of the two divisions. fund all of Division B’s projects first since they tend to be less risky and then allocate the remaining funds to the Division A projects that have the highest net present values. allocate the company’s funds to the projects with the highest net present values based on the company’s weighted average cost of capital. assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.fund the highest net present value projects from each division based on an allocation of 65 percent of the funds to Division A and 35 percent of the funds to Division B.
A reduction in the risk-free rate 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 the firm currently pays an annual dividend of $1 a share and has a beta of 1.2.Multiple ChoiceA reduction in the dividend amount An increase in the dividend amount A reduction in the market rate of return A reduction in the firm’s beta A reduction in the risk-free rate
EBIT(TC). When computing the adjusted cash flow from assets, the tax amount is calculated as:Multiple ChoiceEBT(TC). (EBT − Depreciation)(TC). (EBIT + Depreciation − Change in NWC − Capital spending)(TC). EBIT(TC).(EBIT − Depreciation − Change in NWC − Capital spending)(TC).
A decrease in the company’s tax rate Which one of these will increase a company’s aftertax cost of debt?Multiple ChoiceA decrease in the company’s debt-equity ratio A decrease in the company’s tax rateAn increase in the credit rating of the company’s bonds An increase in the company’s beta A decrease in the market rate of interest
both the returns currently required by its debtholders and stockholders. A company’s current cost of capital is based on:Multiple Choiceonly the return required by the company’s current shareholders. the current market rate of return on equity shares. the weighted costs of all future funding sources. both the returns currently required by its debtholders and stockholders.the company’s original debt-equity ratio.
weighted average cost of capital. 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:Multiple Choicereward-to-risk ratio. weighted capital gains rate. structured cost of capital.subjective cost of capital. weighted average cost of capital.
standard deviation of the company’s common stock. The weighted average cost of capital for a company is least dependent upon the:Multiple Choicecompany’s beta. coupon rate of the company’s outstanding bonds. growth rate of the company’s dividends. company’s marginal tax rate. standard deviation of the company’s common stock.
the simplicity of the model. The primary advantage of using the dividend growth model to estimate a company’s cost of equity is:Multiple Choicethe ability to apply either current or future tax rates. the model’s applicability to all corporations. is the model’s consideration of risk. the stability of the computed cost of equity over time. the simplicity of the model.
probably be put on hold until its cost of capital can be lowered. The Road Stop is a national hotel chain with a cost of capital of 12.4 percent. This chain is considering opening a high-end resort that is expected to have a cost of capital that is at least 13 percent. The estimated net present value of the resort project is $500 when discounted at 12.4 percent. The best representation of this situation is that the resort project should:Multiple Choicebe accepted immediately. be financed solely with debt in order for the project to have a positive NPV. probably be put on hold until its cost of capital can be lowered.be permanently rejected. probably be expanded.
Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects. Which one of the following statements is correct?Multiple ChoiceThe subjective approach assigns a discount rate to each project based on other companies in the same category as the project. Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.Companies will correctly accept or reject every project if they adopt the subjective approach. Mandatory projects should only be accepted if they produce a positive NPV when the overall company WACC is used as the discount rate.
pure play 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.Multiple Choicesubjective risk pure playdivisional cost of capital capital adjustment security market line
is affected by either a change in the company’s beta or its projected rate of growth. The cost of equity for a company with a debt-equity ratio of .41:Multiple Choicetends to remain static even as the company’s level of risk increases. increases as the unsystematic risk of the company’s stock increases. is affected by either a change in the company’s beta or its projected rate of growth.equals the risk-free rate plus the market risk premium. equals the company’s pretax weighted average cost of capital.
The tax effect of the interest expense must be removed. Why does the tax amount need to be adjusted when valuing a firm using the cash flow from assets approach?Multiple ChoiceThe tax effect of the dividend payments must be eliminated. Only straight-line depreciation can be used when computing taxes for valuation purposes. Taxes must be computed for valuation purposes based solely on the marginal tax rate. The tax effect of the interest expense must be removed.The taxes must be computed for valuation purposes based on the average tax rate for the past ten years.
assumes the reward-to-risk ratio is constant. The capital asset pricing model approach to equity valuation:Multiple Choiceis dependent upon the unsystematic risk of a security. assumes the reward-to-risk ratio increases as beta increases. can only be applied to dividend-paying firms. assumes a firm’s future risks will be higher than its current risks. assumes the reward-to-risk ratio is constant.
is highly dependent upon a company’s tax rate. The aftertax cost of debt:Multiple Choicevaries inversely to changes in market interest rates. will generally exceed the cost of equity if the relevant tax rate is zero. will generally equal the cost of preferred if the tax rate is zero. is unaffected by changes in the market rate of interest. is highly dependent upon a company’s tax rate.
The WACC would most likely decrease if the firm replaced its preferred stock with debt Which one of the following statements related to WACC is correct for a company that uses debt in its capital structure?Multiple ChoiceThe WACC would most likely decrease if the firm replaced its preferred stock with debt.The weight assigned to preferred stock decreases as the market value of the preferred stock increases. The WACC will decrease as the corporate tax rate decreases. The weight of equity is based on the number of shares outstanding and the book value per share. The WACC will remain constant unless a company retires some of its debt.
Neither Deep Mining nor Precious Metals Deep Mining and Precious Metals are separate firms that are both considering a silver mining project. Deep Mining is in the actual mining business and has an aftertax cost of capital of 16.2 percent. Precious Metals is in the precious gem retail business and has an aftertax cost of capital of 13.4 percent. The project under consideration has initial costs of $950,000 and anticipated annual cash inflows of $165,000 a year for 12 years. Which firm(s), if either, should accept this project?Multiple ChoiceDeep Mining only Precious Metals only Both Deep Mining and Precious Metals Neither Deep Mining nor Precious MetalsCannot be determined without further information
Cost of equity 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?Multiple ChoiceDividend yield Cost of equityCapital gains yield Cost of capital Income return
is dependent upon a reliable estimate of the market risk premium Assume Russo’s has a debt-equity ratio of .4 and uses the capital asset pricing model to determine its cost of equity. As a result, the company’s cost of equity:Multiple Choiceis affected by the firm’s rate of growth projections. implies that the firm pays out all of its earnings to its shareholders. is dependent upon a reliable estimate of the market risk premium.would be unaffected if the dividend discount model were applied instead. will be unaffected by changes in overall market risks.
cost of debt. Textile Mills borrows money at a rate of 8.7 percent. This interest rate is referred to as the:Multiple Choicecompound rate. current yield. cost of debt.capital gains yield. cost of capital.
may cause the company’s overall weighted average cost of capital to either increase or decrease over time. Assigning discount rates to individual projects based on the risk level of each project:Multiple Choicemay cause the company’s overall weighted average cost of capital to either increase or decrease over time.will prevent the company’s overall cost of capital from changing over time. will cause the company’s overall cost of capital to decrease over time. decreases the value of the company over time. negates the company’s goal of creating the most value for its shareholders.
are based on the market values of the outstanding securities. The capital structure weights used in computing a company’s weighted average cost of capital:Multiple Choiceare based on the book values of debt and equity. are based on the market values of the outstanding securities.depend upon the financing obtained to fund each specific project. remain constant over time unless new securities are issued or outstanding securities are redeemed. are restricted to debt and common stock.
The cost of equity is unaffected by a change in the company’s tax rate. Black River Tours has a capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. The dividend payout ratio is 30 percent, the company’s beta is 1.21, and the tax rate is 21 percent. Given this, which one of the following statements is correct?Multiple ChoiceThe aftertax cost of debt will be greater than the current yield-to-maturity on the company’s outstanding bonds. The company’s cost of preferred is most likely less than the company’s actual cost of debt. The cost of equity is unaffected by a change in the company’s tax rate.The cost of equity can only be estimated using the capital asset pricing model. The weighted average cost of capital will remain constant as long as the company’s capital structure remains constant.
the weighted average of the flotation costs associated with each form of financing. The flotation cost for a company is computed as:Multiple Choicethe arithmetic average of the flotation costs of both debt and equity. the weighted average of the flotation costs associated with each form of financing.the geometric average of the flotation costs associated with each form of financing. one-half of the flotation cost of debt plus one-half of the flotation cost of equity. a weighted average based on the book values of the company’s outstanding securities.
is equal to the dividend yield. The cost of preferred stock:Multiple Choiceis equal to the dividend yield.is equal to the yield to maturity. is highly dependent on the dividend growth rate. is independent of the stock’s price. decreases when tax rates increase.
assigns discount rates to projects based on the discretion of the senior managers of a firm. The subjective approach to project analysis:Multiple Choiceis used only when a firm has an all-equity capital structure. uses the WACC of Firm X as the basis for the discount rate for a project under consideration by Firm Y. assigns discount rates to projects based on the discretion of the senior managers of a firm.allows managers to randomly adjust the discount rate assigned to a project once the project’s standard deviation has been determined. applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt.
the risks associated with the use of the funds required by the project. The discount rate assigned to an individual project should be based on:Multiple Choicethe company’s overall weighted average cost of capital. the actual sources of funding used for the project. an average of the company’s overall cost of capital for the past five years. the current risk level of the overall firm. the risks associated with the use of the funds required by the project.
rate of return a company must earn on its existing assets to maintain the current value of its stock. The weighted average cost of capital for a firm with debt is the:Multiple Choicediscount rate that the firm should apply to all of the projects it undertakes. rate of return a company must earn on its existing assets to maintain the current value of its stock.coupon rate the firm should expect to pay on its next bond issue. minimum discount rate the firm should require on any new project. rate of return debtholders should expect to earn on their investment in this firm.
increase the initial project cost by dividing that cost by (1 − .083). When a firm has flotation costs equal to 8.3 percent of the funding need, project analysts should:Multiple Choiceincrease the project’s discount rate to offset these expenses by multiplying the company’s WACC by 1.083. increase the project’s discount rate to offset these expenses by dividing the company’s WACC by (1 − .083). add 8.3 percent to the company’s firm’s WACC to determine the discount rate for the project. increase the initial project cost by multiplying that cost by 1.083. increase the initial project cost by dividing that cost by (1 − .083).
prefer higher risk projects over lower risk projects. Jenner’s is a multi-division firm that uses its overall WACC as the discount rate for all proposed projects. Each division is in a separate line of business and each presents risks unique to those lines. Given this, a division within the firm will tend to:Multiple Choicereceive less project funding if its line of business is riskier than that of the other divisions. avoid risky projects so it can receive more project funding. become less risky over time based on the projects that are accepted. have an equal probability with all the other divisions of receiving funding. prefer higher risk projects over lower risk projects.
depends upon how the funds raised for that project are going to be spent. The cost of capital for a new project:Multiple Choiceis determined by the overall risk level of the firm. is dependent upon the source of the funds obtained to fund that project. is dependent upon the firm’s overall capital structure. should be applied as the discount rate for all other projects considered by the firm. depends upon how the funds raised for that project are going to be spent.
increase the initial cash outflow of the project. Incorporating flotation costs into the analysis of a project will:Multiple Choicecause the project to be improperly evaluated. increase the net present value of the project. increase the project’s rate of return. increase the initial cash outflow of the project.have no effect on the present value of the project.

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