Which is true when evaluating two (2) companies operating in the same industry? Since they may have different betas, they should have the different risk-free rates. They should have the same beta. Regardless of capital structure, they should have the same risk-free rate in computing for cost of common equity. They should have the same cost of capital.

Which is true when evaluating two (2) companies operating in the same industry? Since they may have different betas, they should have the different risk-free rates. They should have the same beta. Regardless of capital structure, they should have the same risk-free rate in computing for cost of common equity. They should have the same cost of capital.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 6QE

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Which is true when evaluating two (2) companies operating in the same industry? Since they may have different betas, they should have the different risk-free rates. They should have the same beta. Regardless of capital structure, they should have the same risk-free rate in computing for cost of common equity. They should have the same cost of capita
Consider two firms that are alike in every way except that Firm A has fixed rate debt in its capital structure and Firm B has variable rate debt. Which firm has riskier equity? Why?
When a firm has businesses with different risk profiles, different investments can have different costs of equity and capital. What is the relationship between the firm’s cost of equity and capital and its projects’ costs of equity and capital?
Which of the following statements is CORRECT? a. WACC calculations should be based on the before-tax costs of all the individual capital components. b. Flotation costs associated with issuing new common stock normally reduce the WACC. c. An increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing. d. A change in a company's target capital structure cannot affect its WACC. e. If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline.
Which of the following statements is FALSE? a) The Capital Asset Pricing Model is the most important method for estimating the cost of capital that is used in practice. b) Because the risk that determines expected returns is unsystematic risk, which is measured by beta, the cost of capital for an investment is the expected return available on securities with the same beta. c) A common assumption is that a project has the same risk as the firm. d) To determine a project's cost of capital we need to estimate its beta.
What weights should be used when you calculatethe WACC? Discuss the choice between book value and market value weights, and the role of the“target” capital structure for a firm whose actualcapital structure is far removed from the target.
Which of the following is most correct about the cost of capital? The cost of debt reflects the interest rates on debt capital before taking into account the tax effects. Cost of capital is affected by the required rates of return of each of the source of capital, regardless of the capital structure. The capital asset pricing model is the most widely used model to estimate the cost of common equity. To minimize the cost of capital, firms should borrow more than their capacity because increasing the lower cost of debt yields the lowest cost of capital, thus, enhances shareholder value.
When trying to estimate the cost of equity for a firm using the CAPM, it is possible to find the beta of a comparable, publicly traded firm whose primary business is closely related to the firm at hand. Select one: a. True b. False
Modigliani and Miller (MM), on the one hand, and Gordon and Lintner (GL), on the otherhand, have expressed strong views regarding the effect of dividend policy on a firm’s costof capital and value.a. In essence, what are MM’s and GL’s views regarding the effect of dividend policy onthe cost of capital and stock prices?b. How could MM use the information content, or signaling, hypothesis to counter theiropponents’ arguments? If you were debating MM, how would you counter them?c. How could MM use the clientele effect concept to counter their opponents’ arguments?If you were debating MM, how would you counter them?
Would a firm that has many good investment opportunities be likely to have ahigher or a lower dividend payout ratio than a firm with few good investment opportunities?Explain.
a. What is the meant beta (β)? How would you interpret if β=1, β>1 and β<1? b. Differentiate between systematic and unsystematic risks. c. What is equity capital? Write two advantages and two disadvantages to the firm of raising capital this way. d) What is meant by capital structure and how is it different from financial structure?
The cost of capital is affected by some factors that are under the firm’s control and some that are not. What are the factors the firm can and cannot control and what will be the impact of these factors on companies average cost of capital (WACC)? What factors determine the beta of a stock? Define and describe each.