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Question;Multiple Choice;and True/False Questions;12.1 Financial Globalization and Strategy;1) Which of the;following is NOT a key variable in the weighted average cost of capital (WACC);equation?;A) the market;value of equity;B) the market;value of debt;C) the risk-free;rate of return;D) the marginal;tax rate;2) The weighted;average cost of capital (WACC) is;A) the required;rate of return for all of a firm's capital investment projects.;B) the required;rate of return for a firm's average risk projects.;C) not applicable;for use by MNE.;D) equal to 13%.;3) Which of the;following is NOT a key variable in the weighted average cost of capital (WACC);equation?;A) the before-tax;cost of debt;B) the;risk-adjusted cost of equity;C) the beta of;the market portfolio;D) the total;market value of the firm's securities;4) Other things;equal, an increase in the firm's tax rate will increase the WACC for a firm;that has both debt and equity financing.;5) The capital;asset pricing model (CAPM) is an approach;A) to determine;the price of equity capital.;B) used by;marketers to determine the price of saleable product.;C) can be applied;only to domestic markets.;D) none of the;above.;6) Which of the;following is NOT a key variable in the equation for the capital asset pricing;model?;A) the risk-free;rate of interest;B) the expected;rate of return on the market portfolio;C) the marginal;tax rate;D) All are;important components of the CAPM.;7) ________ risk;is a function of the variability of expected returns of the firm's stock;relative to the market index and the measure of correlation between the;expected returns of the firm and the market.;A) Systematic;B) Unsystematic;C) Total;D) Diversifiable;8) Systematic;risk;A) is the;standard deviation of a securities returns.;B) is measured;with beta.;C) is measured;with standard deviation.;D) none of the;above.;9) If a firm's;expected returns are more volatile than the expected return for the market;portfolio, it will have a beta less than 1.0.;10) Which of the;following is generally unnecessary in measuring the cost of debt?;A) a forecast of;future interest rates;B) the;proportions of the various classes of debt a firm proposes to use;C) the corporate;income tax rate;D) All of the;above are necessary for measuring the cost of debt.;11) The after-tax;cost of debt is found by;A) dividing the;before-tax cost of debt by (1 - the corporate tax rate).;B) subtracting (1;- the corporate tax rate) from the before-tax cost of debt.;C) multiplying;the before-tax cost of debt by (1 - the corporate tax rate).;D) subtracting;the corporate tax rate from the before-tax cost of debt.;12) The WACC is;usually used as the risk-adjusted required rate of return for new projects that;are of the same average risk as the firm's existing projects.;13) A firm whose;equity has a beta of 1.0;A) has greater;systematic risk than the market portfolio.;B) stands little;chance of surviving in the international financial market place.;C) has less;systematic risk than the market portfolio.;D) None of the;above is true.;14) One of the;distinct features of international equity markets is that over the last 100 or;so years, the average market risk premium is almost identical across major;industrial countries.;15) The;difference between the expected (or required) return for the market portfolio;and the risk-free rate of return is referred to as ________.;A) beta;B) the geometric;mean;C) the market;risk premium;D) the arithmetic;mean;16) In general;the geometric mean will be ________ the arithmetic mean for a series of;returns.;A) less than;B) greater than;C) equal to;D) greater than;or equal to;17) The beginning;share price for a security over a three-year period was $50. Subsequent;year-end prices were $62, $58 and $64. The arithmetic average annual rate of;return and the geometric average annual rate of return for this stock were;A) 9.30% and;8.78%, respectively.;B) 9.30% and;7.89%, respectively.;C) 9.30% and;7.03%, respectively.;D) 9.30% and;6.37%, respectively.;18) If a company;fails to accurately predict it's cost of equity, then;A) the firm's;wacc will also be inaccurate.;B) the firm may;not be using the proper interest rate to estimate NPV.;C) the firm my;incorrectly accept or reject projects based on decisions made using the cost of;capital computed with an incorrect cost of equity.;D) all of the;above are true.;19) Ready Supply;Co. has a cost of debt of 8%. The risk-free rate of interest is 3% and the;expected return on the market portfolio is 10%. If the firm has a beta of 0.90;and an effective tax rate of 30% with a capital structure that is 40% debt and;60% equity, what is the firm's weighted average cost of capital?;A) 7.82%;B) 9.30%;C) 5.60%;D) 8.00%;20) Johnson Fuel;Systems has a weighted average cost of capital of 7.35%. Estimate Johnson's cost of equity given the;following information: The firm's;effective tax rate is 25%, they have an equal mix of debt and equity, the required;return on the market portfolio is 9%, Johnson has a before-tax cost of debt of;6%, and the risk-free rate of return is 3%.;A) 2.25%;B) 5.10%;C) 9.00%;D) 10.20%;21) LipTea;Incorporated purchases raw materials and has processing plants around the world. They also have an international market for;their product. Because of their presence;in so many countries LipTea has the ability to raise capital around the world;in several different markets. LipTea is truly an MNE. If the firm has an average pre-tax cost of;debt of 8%, a cost of equity of 13%, and an average tax rate of 40%, what is;their after-tax cost of debt?;A) 3.2%;B) 8.0%;C) 4.8%;D) 10.5%;22) LipTea;Incorporated purchases raw materials and has processing plants around the;world.;The firm has an;average pre-tax cost of debt of 8%, an average tax rate of 40%, and an;international equity beta of 1.2. The risk-free rate of return is anticipated;to be 4% and the return to the international market portfolio to be 12%. If the firm finances 40% with debt and 60%;with equity, what is the after-tax WACC?;A) 10.08%;B) 12.96%;C) 11.36%;D) 10.50%;23) LipTea;Incorporated purchases raw materials and has processing plants around the;world.;The standard;deviation of the firm?s equity returns is 1.2 times as great as the market?s;standard deviation of returns. If the;correlation of LipTea?s returns with the market?s is 0.80, what is the;systematic risk of the firm?;A) 1.50;B) 1.20;C) 0.96;D) There is not;enough information to answer this question.;24) LipTea;Incorporated purchases raw materials and has processing plants around the;world.;The firm finances;30% of its assets with debt and 70% with equity, has a 30% average tax rate;and can issue bonds at a pre-tax rate of 7%. Their standard deviation of returns;is roughly 1.50 times as great as the market?s returns, and has a correlation;with the market of 0.45. If the;risk-free rate of return is 5% and the expected return on the international;market portfolio is 14%, what is the firm?s WACC?;A) 7.75%;B) 8.38%;C) 12.24%;D) There is not;enough information to answer this question.

Paper#51222 | Written in 18-Jul-2015

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