A. It doesn’t explicitly adjust for risk.
B. It requires that we estimate the beta coefficient of the stock, and if this estimate is poor, the resulting cost of equity will also be poor.
C. We rely on the past to predict the future, and economic conditions can change quickly.
D. It requires that we estimate the market risk premium, and if this estimate is poor, the resulting cost of equity will also be poor.
Q3. Which cost is an indirect cost of bankruptcy to the firm?
A. Administrative costs not associated with the bankruptcy
B. Legal costs associated with the bankruptcy
C. Loss of sales from people not wanting to buy a product from a bankrupt company
D. Administrative costs associated with the bankruptcy
Q4. What’s the abbreviation for the overall return that a firm must make on its existing assets, used as the required rate of return on any investment that has essentially the same risks as existing operations?
Q5. Alphabet, Inc. (GOOGL) has a 40 percent debt/asset ratio; assume a tax rate of 16 percent. The average yield to maturity on GOOGL’s bonds is 3 percent. Your market analyst estimates that the risk-free rate is 1 percent and that the market risk premium is 7 percent. The firm’s beta coefficient is 0.97. What’s Alphabet’s weighted average cost of capital (WACC)? (Round to the nearest tenth of a percent.)
A. 5.7 percent
B. 5.9 percent
C. 7.3 percent
D. 6 percent
Q6. What’s the relationship between the WACC and the structure of the firm?
A. There’s no relationship between WACC and the value of the firm.
B. The lower the WACC, the higher the value of the firm.
C. The lower the WACC, the lower the value of the firm.
D. The lower the WACC, the higher the value of the firm to a certain point; then the relationship reverses.
Q7. Assuming a firm has bonds outstanding, the best way to determine the firm’s cost of debt is the
A. yield to maturity of a competitor’s bonds.
B. yield to maturity on the firm’s bonds.
C. coupon rate of the firm’s bonds.
D. coupon rate of competitor’s bonds.
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