FIN 3100 Exam 3 questions with verified
solutions
Rd - correct answer ✔✔before tax cost of debt
Rp - correct answer ✔✔cost of preferred stock
Rs - correct answer ✔✔cost of common equity raised by retaining earnings
Re - correct answer ✔✔cost of common equity raised by issuing new stock
The ______________________ - correct answer ✔✔rd is the interest that a firm pays on any new debt
financing
Has a par value, usually has no voting rights - correct answer ✔✔debt
no tax adjustments are made when calculating the cost of preferred stock, failure to pay a preferred
dividend does not send the firm into bankrupcy - correct answer ✔✔Equity
A firm's before-tax cost of debt, ______ , is the interest rate that the firm must pay on debt - correct
answer ✔✔rd
True or False - correct answer ✔✔No tax adjustment is made when calculating rp
Best estimate for cost of equity is ... - correct answer ✔✔average of CAPM, DDM, and bold yield plus risk
premium
If looking at NPV alone - correct answer ✔✔-if independent, consider both
-if mutually exclusive, pick highest NPV
, If looking at IRR - correct answer ✔✔-if independent, consider both
-if mutually exclusive, highest IRR
crossover rate - correct answer ✔✔where two projects' NVPs intersect and equal to each other
Can accept project if - correct answer ✔✔NPV>0 and IRR>WACC, if independant
As cost of capital increases, NPV ____________ - correct answer ✔✔decreases
If projects are _____________ exclusive, only one project can be chosen - correct answer ✔✔mutually
IRR cash flows are reinvested at - correct answer ✔✔internal rate of return
NPV cash flows are reinvested at - correct answer ✔✔required rate of return
Which is the best method of decision making - correct answer ✔✔NPV
Which payback period method would be most accurate - correct answer ✔✔discounted payback period
The discounted payback ____________ does not take the project's entire life into account - correct
answer ✔✔does not
Advantages of discounted payback period - correct answer ✔✔-calculated by using net income instead
of cash flow
-does not take the time value of money into account
The discounted payback period improves on the regular payback period by - correct answer
✔✔accounting the time value of money
solutions
Rd - correct answer ✔✔before tax cost of debt
Rp - correct answer ✔✔cost of preferred stock
Rs - correct answer ✔✔cost of common equity raised by retaining earnings
Re - correct answer ✔✔cost of common equity raised by issuing new stock
The ______________________ - correct answer ✔✔rd is the interest that a firm pays on any new debt
financing
Has a par value, usually has no voting rights - correct answer ✔✔debt
no tax adjustments are made when calculating the cost of preferred stock, failure to pay a preferred
dividend does not send the firm into bankrupcy - correct answer ✔✔Equity
A firm's before-tax cost of debt, ______ , is the interest rate that the firm must pay on debt - correct
answer ✔✔rd
True or False - correct answer ✔✔No tax adjustment is made when calculating rp
Best estimate for cost of equity is ... - correct answer ✔✔average of CAPM, DDM, and bold yield plus risk
premium
If looking at NPV alone - correct answer ✔✔-if independent, consider both
-if mutually exclusive, pick highest NPV
, If looking at IRR - correct answer ✔✔-if independent, consider both
-if mutually exclusive, highest IRR
crossover rate - correct answer ✔✔where two projects' NVPs intersect and equal to each other
Can accept project if - correct answer ✔✔NPV>0 and IRR>WACC, if independant
As cost of capital increases, NPV ____________ - correct answer ✔✔decreases
If projects are _____________ exclusive, only one project can be chosen - correct answer ✔✔mutually
IRR cash flows are reinvested at - correct answer ✔✔internal rate of return
NPV cash flows are reinvested at - correct answer ✔✔required rate of return
Which is the best method of decision making - correct answer ✔✔NPV
Which payback period method would be most accurate - correct answer ✔✔discounted payback period
The discounted payback ____________ does not take the project's entire life into account - correct
answer ✔✔does not
Advantages of discounted payback period - correct answer ✔✔-calculated by using net income instead
of cash flow
-does not take the time value of money into account
The discounted payback period improves on the regular payback period by - correct answer
✔✔accounting the time value of money
