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T/F: If you invest in stocks with higher-than-average betas, you are certain to earn higher-than-average returns over the next year.
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- Which of the following statements is CORRECT?a. If a firm has enough retained earnings to fund its capital budget, then there is no need to estimate a cost of equity when determining the WACC.b. The component cost of preferred stock is expressed as rp(1 - T). This follows because preferred stock dividends are treated as fixed charges, and as such they can be deducted by the issuer for tax purposes.c. A cost should be assigned to retained earnings due to the opportunity cost principle, which refers to the fact that the firm's stockholders could themselves earn a return on earnings if they were paid out rather than retained and reinvested.d. Suppose a firm has been losing money and thus is not paying taxes, and this situation is expected to persist into the foreseeable future. In this case, the firm's before-tax and after-tax costs of debt will both be equal to the interest rate on the firm's currently outstanding debt, which was issued during the past 5 years.e. No cost should be assigned to retained earnings because the firm does not have to pay anything to raise them-they are generated as cash flows by operating assets that were raised in the past, hence they are "free."
- Which one of the following is most apt to align management's priorities with shareholders' interests?A. Compensating managers with shares of stock that must be held for 3 years before the shares can be soldB. Allowing a manager to decorate his or her own office once he or she has been in that office for a period of 3 years or moreC. Increasing the number of paid holidays that long-term employees are entitled to receiveD. Allowing employees to retire early with full retirement benefits
- The NPV method implicitly assumes that the rate at which cash flows can be reinvested is the required rate of return, whereas the IRR method implies that the firm has the opportunity to reinvest at the project's IRR.