Weighted Average Cost Of Capital (Wacc) X1 Trivia Quiz

$42,825

$97,331

$67,998

103,063

$1667

$588

$2000

$909

$71,429

$500,000

$166,667

This problem cannot be solved.

Long-term asset

Current asset

Current liability

Long-term liability

The balance sheet provides a snapshots of the firm's financial position at a given point in time.

The balance sheet lists the firm's assets and liabilities.

The balance sheet reports stockholders' equity on the right hand side.

The balance sheet reports liabilities on the left hand side.

Assets - Liabilities = Shareholders' Equity

Assets = Liabilities + Shareholders' Equity

Assets - Current Liabilities = Long Term Liabilities

Assets - Current Liabilities = Long Term Liabilities + Shareholders' Equity

Long-term liability.

Current liability.

Current asset.

long-term asset.

$3565

$6750

$7015

$7035

$600

$800

$1000

$1200

We assume that r < g for a growing perpetuity.

PV of a growing perpetuity =

To find the value of a growing perpetuity one cash flow at a time would take forever.

A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever.

A growing annuity is a stream of N growing cash flows, paid at regular intervals.

We assume that g < r when using the growing annuity formula.

PV of a growing annuity = C ×

A growing annuity is like a growing perpetuity that never comes to an end.

The difference between an annuity and a perpetuity is that an annuity ends after some fixed number of payments.

Most car loans, mortgages, and some bonds are annuities.

A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever.

An annuity is a stream of N equal cash flows paid at irregular intervals.

7.72%

8.00%

8.30%

8.66%

3.92%

4.00%

4.08%

14.60%

$694

$708

$1540

$1600

$708

$1530

$1540

$1600

$14,808

$22,212

$32,000

$37,020

$14,808

$20,300

$22,212

$32,000

The relationship between the investment term and the interest rate is called the term structure of interest rates.

Real interest rates indicate the rate at which your money will grow if invested for a certain period.

The yield curve is a potential leading indicator of future economic growth.

D) The shape of the yield curve will be strongly influenced by interest rate expectations.

The plot of the relationship between the investment risk and the interest rate is call the yield curve.

Each of the last six recessions in the United States was preceded by a period with an inverted yield curve.

The nominal interest rate does not represent the increase in purchasing power that will result from investing.

A risk-free cash flow received in two years should be discounted at the two-year interest rate.

The principal or face value of a bond is the notional amount we use to compute the interest payments.

Payments are made on bonds until a final repayment date, called the term date of the bond.

The coupon rate of a bond is set by the issuer and stated on the bond certificate.

The promised interest payments of a bond are called coupons.

The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond.

The bond certificate indicates the amounts and dates of all payments to be made.

The only cash payments the investor will receive from a zero coupon bond are the interest payments that are paid up until the maturity date.

Usually the face value of a bond is repaid at maturity.

The amount of each coupon payment is determined by the coupon rate of the bond.

Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.

The simplest type of bond is a zero-coupon bond.

Treasury bills are U.S. government bonds with a maturity of up to one year.

$946

$919

$1086

$1000

A premium.

A discount.

Par.

None of the above

Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond.

The yield to maturity of a defaultable bond is equal to the expected return of investing in the bond.

The risk of default, which is known as the credit risk of the bond, means that the bond's cash flows are not known with certainty.

For corporate bonds, the issuer may default—that is, it might not pay back the full amount promised in the bond certificate.

Bond ratings encourage widespread investor participation and relatively liquid markets.

Bonds in the top four categories are often referred to as investment grade bonds.

A bond's rating depends on the risk of bankruptcy as well as the bondholder's ability to lay claim to the firm's assets in the event of a bankruptcy.

Debt issues with a low-priority claim in bankruptcy will have a better rating than issues from the same company that have a higher priority in bankruptcy.

The IRR investment rule will identify the correct decision in many, but not all, situations.

By setting the NPV equal to zero and solving for r, we find the IRR.

If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.

The simplest investment rule is the NPV investment rule.

In general, the difference between the cost of capital and the IRR is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision.

The IRR can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital.

If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.

If the cost of capital estimate is more than the IRR, the NPV will be positive.

$2.00 million

$2.20 million

$3.00 million

$3.75 million

-27.25%

-37.50%

27.25%

37.50%

Cannibalization.

Considered as part of the initial investment in the project.

An opportunity cost.

A sunk cost.

An opportunity cost.

Irrelevant to the investment decision.

An overhead expense.

A sunk cost.

$25.00

$15.00

$31.25

$27.50

$17.00

$10.75

$27.75

$43.50

$47.24

$37.24

$37.34

$30.00

Future dividend payments and stock prices are not known with certainty; rather these values are based on the investor's expectations at the time the stock is purchased.

The capital gain is the difference between the expected sale price and the purchase price of the stock.

The sum of the dividend yield and the capital gain rate is called the total return of the stock.

We divide the capital gain by the expected future stock price to calculate the capital gain rate.

1017.66 million

1013.66 million

1019.66 million

1011.33 million

37

40

24

80

17.00

13.50

14.25

7.00

$49.30

$43.10

$24.15

$27.60

$33.00

$82.50

$43.10

$21.25

7.5%

15%

5%

10%

.151

.0378

0

.075

38.9%

0%

19.4%

27.5%

The risk that oil prices rise, increasing production costs

The risk of a product liability lawsuit

The risk that the CEO is killed in a plane crash

The risk of a key employee being hired away by a competitor

The risk that oil prices rise, increasing production costs

The risk that the Federal Reserve raises interest rates

The risk that the economy slows, reducing demand for your firm's products

The risk that your new product will not receive regulatory approval

The weighted average of the equity beta and the debt beta.

The weighted average of the levered beta and the equity beta.

The debt beta minus the equity beta.

The unlevered beta minus the cost of capital.

The weighted average of the equity cost of capital and the debt cost of capital.

The weighted average of the levered cost of capital and the equity cost of capital.

The debt cost of capital minus the equity cost of capital.

The unlevered beta minus the cost of capital.

Its unlevered beta and cost of capital equalling zero.

Its unlevered beta and cost of capital being greater than its equity beta and cost of capital.

The risk of the firm's equity being increased by its cash holdings in excess of its operating needs.

The risk of the firm's debt being increased by its cash holdings in excess of its operating needs.