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FIN 701 Module 5 Exam Questions with Latest Update $10.49   Add to cart
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FIN 701 Module 5 Exam Questions with Latest Update
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capital - Answer-represents the funds used to finance a firm's assets and operations cost of capital - Answer-average cost of financing the company's assets hurdle rate - Answer-minimum rate of return which a firm must earn on its investments to provide a return to its investors based on the ...

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  • August 23, 2024
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  • 2024/2025
  • Exam (elaborations)
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  • fin 701 module 5 exam questions with latest update
  • capital answer represents the funds used to fina

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FIN 701 Module 5 Exam Questions with
Latest Update
capital - Answer-represents the funds used to finance a firm's assets and operations

cost of capital - Answer-average cost of financing the company's assets

hurdle rate - Answer-minimum rate of return which a firm must earn on its investments
to provide a return to its investors based on the risk of the assets

cost of equity - Answer-the return that is required by investors and is based on the risk
of the firm's cash flows

dividend discount model - Answer-a variant of a growing perpetuity model and requires
that dividends are expected to grow at a constant rate forever and that the discount rate
is greater than the growth rate
Pros:
-easy to understand and use
Cons:
-only works if the firm pays dividends
-may not be applicable if dividends are not growing at a constant rate
-risk is not considered
-E(Re) is sensitive to estimated rate

security market line - Answer-a positively sloped straight line displaying the relationship
between expected return and beta:
Pros
-adjusts for the stock's systematic risk
-applicable to all companies (if beta available)
Cons
-E(MRP) must be estimated; MRP varies over time
-Beta must be estimated; Beta varies over time
-Assumes past risk predicts future return

cost of debt - Answer-interest rate or required rate of return on new debt for the firm;
yield to maturity

yield to maturity - Answer-the rate of return a bondholder will receive if the bond is held
to maturity

WACC - Answer-Weighted average cost of capital. The minimum return a company
needs to satisfy all its investors; the rate of return a firm must earn on its existing assets
to maintain the current value of its stock; the average of a firm's cost of equity and after-
tax costs of debt that is weighted based on the firm's capital structure

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