Fin 355 Exam Ch 9-12

if a typical US company uses the same cost of capital to evaluate all projects, the firm will most likely become: a. riskier over time, and its intrinsic value will not be maximized b. riskier over time, but its intrinsic value will be maximized c. less risky over time, and its intrinsic value will not be maximized d. less risky over time, and its intrinsic value will be maximized

a. riskier over time, and its intrinsic value will not be maximized

which of the following statement is CORRECT? a. the WACC can change depending on the amount of funds a firm raises during a given year. Moreover WACC at each level of funds raised is a weighted average of the marginal costs of each capital component with the weights based on the firms target capital structure. b. the WACC is calculated using a before tax cost for debt equal to the interest rate that must be paid on debt, along with the after-tax cost of common stock and for preferred stock if it is used . c. an increase in the risk free rate is likely to reduce the marginal costs of both debt and equity

a. the WACC can change depending on the amount of funds a firm raises during a given year. Moreover WACC at each level of funds raised is a weighted average of the marginal costs of each capital component with the weights based on the firms target capital structure.

For a company whose target capital structure calls for 50% debt and 50% common equity, which of the following statements is correct? a. the cost of equity is usually greater than the cost of debt b.the WACC is calculated on a before-tax basis c. the interest used to calculate the WACC is the average cost of all

a. the cost of equity is usually greater than the cost of debt

Nachman corporation forecasts that if all of its existing financial policies are adhered to, its proposed capital budget would be so large that it would have to issue new common stock. Which of the following actions would REDUCE its need to issue new stock? a. increase the dividend payout ratio for the upcoming year b. increase the percentage of debt in the target capital structure c. increase the proposed capital budget d. reduce the amount of short term bank debt in order to increase the current ratio

b. increase the percentage of debt in the target capital structure

Wagner Inc. estimates that its average risk projects have a WACC of 10%, its below average risk projects have a WACC of 8%, and above average risk projects have a WACC of 12%. Which of the following projects should the company accept a. project A is of average risk and has a return of 9% b. project B is of below average risk and has a return of 8.5% c. project C is above average risk and has a return of 11%

b. project B is of below average risk and has a return of 8.5%

Which of the following statements is correct? a. the WACC as used in capital budgeting is an estimate of a company's before tax cost of capital b. there is an "opportunity cost" associated with using retained earnings, they are not "free" c. the percentage flotation costs associated with issuing new common equity are typically smaller than the flotation costs for new debt

b. there is an "opportunity cost" associated with using retained earnings, they are not "free"

which of the following statements is CORRECT? a. the component cost of preferred stock is expressed rp(1-T). this follows because preferred stock dividends are not treated as fixed charges, and as such they can be deducted by the issuer for tax purposes b. no cost should be assigned to retained earnings because the firm does not have to pay anything to raise, they are generated as cash flows by operating assets that were raised in the past, hence they are free c. A cost should be assigned to retained earnings due to the opportunity cost principle, which refers to the fact that the firms stockholders could themselves earn a return on earnings if they were paid out rather than retained and reinvested

c. A cost should be assigned to retained earnings due to the opportunity cost principle, which refers to the fact that the firms stockholders could themselves earn a return on earnings if they were paid out rather than retained and reinvested

Which of the following is not a capital component when calculating the weighted average cost of capital (WACC)? a. long term debt b. common stock c. retained earnings d. accounts payable

d. accounts payable

Which one of the following statements is CORRECT? a. one defect of the IRR method is that it does not take account of cash flows over a projects full life b.one defect of the IRR method is that it does not take account the time value of money c. one defect of the IRR method is that it does not take account the cost of capital d. one defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future e. one defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid

e. one defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid