Overall Cost of Equity Assignment

A firm’s overall cost of equity is:

I. affected by changes in the market risk premium.

II. inversely related to changes in the firm’s tax rate.

III. generally equal to the firm’s WACC for a levered firm.

IV. generally lower than the firm’s after-tax cost of debt.

V. independent upon the growth rate and risk level of the firm.

V only 10 0 0 0 0 )

Ill and V only

O I. IV and V only

Which of the following statements about the dividend growth model is/are correct?

1. The dividend growth model does not work when a firm pays no dividend.

II. The dividend growth model is as reliable as the estimated rate of growth.

III. The dividend growth model can only be used if historical dividend information is available.

IV. The dividend growth model uses standard deviation to measure the systematic risk of a firm.

V. The dividend growth model does not consider the risk that future dividends may vary from their estimated values.

Multiple Choice

O II, III and only

0 I, II and IV only

0 I only

0 II and III only

o I and II only

0 land il only

For NewWay, Inc.’s proposed project, its pro forma financial statements should

I. include interest expense

II. be compiled on an aggregate basis

III. include all the incremental cash flows related to the project

IV. include all project-related fixed asset acquisitions and disposals

Multiple Choice 0

O III and IV only )

I, II, III, and IV

0 II, III, and IV only

0 I and Ill only

0 O I, I, and IV only

Which of the following is/are not financial distress cost(s)?

I. direct bankruptcy costs

II. indirect bankruptcy costs

III. flotation costs related to bond issuance

IV. direct costs related to being financially distressed, but not bankrupt

V. indirect costs related to being financially distressed, but not bankrupt

Multiple Choice

O I, II, III, and IV only

O I and Il only

O III and IV only

O III only O I only

Which of the following statements is/are correct?

I. The depreciation tax shield creates a cash inflow for a project.

II. A project must create a positive operating cash flow without affecting sales.

III. Interest expense should not be included as a cash outflow when analyzing a project.

IV. Project analysis should only include the cash flows that affect the income statement.

V. The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash outflow to the project.

O O III, IV and V only

O I, II, III and V only

O I, II and V only

O O ill and V only. Get Finance homework help today

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