Quiz Ch 10 – Safeco Company and Risco Inc
Fundamentals of Financial Management, Concise
Brigham and Houston
09th Edition
Considering the merger of Safeco Company and Risco Inc., which statement is accurate?
Considering the merger of Safeco Company and Risco Inc., which statement is accurate?
In the case of Schalheim Sisters Inc., a company with a history of paying out all earnings as dividends and using the CAPM for the cost of equity calculations, which of the following scenarios would result in a DECREASE in its Weighted Average Cost of Capital (WACC)?
True or false: The cost of preferred stock to a company needs to be modified to an after-tax value due to the possibility of excluding 70% of received dividends from the corporation’s taxable income.
True or false: In capital budgeting and cost of capital analyses, firms should consider that each dollar of capital aligns with their target capital structure, often comprising a mix of debt, preferred stock, and common equity.
True or false: The WACC calculation utilizes the before-tax cost of debt, which is lower than the after-tax cost.
True or false: The cost of perpetual preferred stock is calculated by dividing the annual dividend of the preferred stock by its market price. Tax adjustment is not required because the issuing firm cannot deduct preferred dividends, unlike debt interest.
True or false: Estimating equity cost via the bond-yield-plus-risk-premium approach often provides a clear view of long-term debt rates, but uncertainty arises from the suitability of added risk premium. This uncertainty affects confidence in determining rs.
True or false: Estimating the cost of equity through the CAPM method presents three potential issues: (1) choosing between long-term or short-term rates for rRF, (2) determining whether the historical beta matches investors’ assessment of the stock, and (3) defining the measurement of the market risk premium, RPM. These challenges result in uncertainty about the actual value of rs.
True or false: Estimating the cost of equity using the DCF method encounters a major challenge in determining the growth rate that investors employ when projecting a stock’s anticipated future return rate. This issue contributes to uncertainty regarding the actual value of rs.
True or false: The cost of retained earnings equity can differ from the cost of external equity from new stock issuance. This variation hinges on factors like taxes, flotation costs, investor sentiment, and more.