A) we should use historical measures of the component costs from prior financings that are still outstanding when estimating a company's wacc for capital budgeting purposes.
B) the cost of new equity (re) could possibly be lower than the cost of reinvested earnings (rs) if the market risk premium, risk-free rate, and the company's beta all decline by a sufficiently large amount.
C) a firm's cost of reinvesting earnings is the rate of return stockholders require on a firm's common stock.
D) the component cost of preferred stock is expressed as rp(1 σ t) , because preferred stock dividends are treated as fixed charges, similar to the treatment of interest on debt.
E) in the wacc calculation, we must adjust the cost of preferred stock (the market yield) to reflect the fact that 70% of the dividends received by corporate investors are excluded from their taxable income.
G) C) and D)
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C
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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) if a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline.
D) an increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing.
E) a change in a company's target capital structure cannot affect its wacc.
G) None of the above
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B) False
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False
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A) 11.10%
B) 11.68%
C) 12.30%
D) 12.94%
E) 13.59%
G) None of the above
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B) False
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A) the flotation costs associated with issuing new common stock increase.
B) the company's beta increases.
C) expected inflation increases.
D) the flotation costs associated with issuing preferred stock increase.
E) the market risk premium declines.
G) A) and B)
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B) False
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B) False
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A) accounts payable.
B) common stock "raised" by reinvesting earnings.
C) common stock raised by new issues.
D) preferred stock.
E) long-term debt.
G) All of the above
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A) increase the percentage of debt in the target capital structure.
B) increase the proposed capital budget.
C) reduce the amount of short-term bank debt in order to increase the current ratio.
D) reduce the percentage of debt in the target capital structure.
E) increase the dividend payout ratio for the upcoming year.
G) B) and E)
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B) False
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B) False
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B) False
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B) False
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A) if evaluated using the correct post-merger wacc, project x would have a negative npv.
B) after the merger, careco/audaco would have a corporate wacc of 11%. therefore, it should reject project x but accept project y.
C) careco/audaco's wacc, as a result of the merger, would be 10%.
D) after the merger, careco/audaco should select project y but reject project x. if the firm does this, its corporate wacc will fall to 10.5%.
E) if the firm evaluates these projects and all other projects at the new overall corporate wacc, it will probably become riskier over time.
G) C) and D)
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A) the project should definitely be rejected because its expected return (before risk adjustment) is less than its required return.
B) riskier-than-average projects should have their expected returns increased to reflect their higher risk. clearly, this would make the project acceptable regardless of the amount of the adjustment.
C) the accept/reject decision depends on the firm's risk-adjustment policy. if weatherall's policy is to increase the required return on a riskier-than-average project to 3% over rs, then it should reject the project.
D) capital budgeting projects should be evaluated solely on the basis of their total risk. thus, insufficient information has been provided to make the accept/reject decision.
E) the project should definitely be accepted because its expected return (before any risk adjustments) is greater than its required return.
G) C) and E)
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C
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A) if a firm's managers want to maximize the value of their firm's stock, they should, in theory, concentrate on project risk as measured by the standard deviation of the project's expected future cash flows.
B) if a firm evaluates all projects using the same cost of capital, and the capm is used to help determine that cost, then its risk as measured by beta will probably decline over time.
C) projects with above-average risk typically have higher than average expected returns. therefore, to maximize a firm's intrinsic value, its managers should favor high-beta projects over those with lower betas.
D) project a has a standard deviation of expected returns of 20%, while project b's standard deviation is only 10%. a's returns are negatively correlated with both the firm's other assets and the returns on most stocks in the economy, while b's returns are positively correlated. therefore, project a is less risky to a firm and should be evaluated with a lower cost of capital.
E) if a firm has a beta that is less than 1.0, say 0.9, this would suggest that the expected returns on its assets are negatively correlated with the returns on most other firms' assets.
G) A) and C)
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A) the wacc is calculated on a before-tax basis.
B) the wacc exceeds the cost of equity.
C) the cost of equity is always equal to or greater than the cost of debt.
D) the cost of reinvested earnings typically exceeds the cost of new common stock.
E) the interest rate used to calculate the wacc is the average after-tax cost of all the company's outstanding debt as shown on its balance sheet.
G) None of the above
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B) False
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A) all else equal, an increase in a company's stock price will increase its marginal cost of reinvested earnings (not newly issued stock) , rs.
B) all else equal, an increase in a company's stock price will increase its marginal cost of new common equity, re.
C) since the money is readily available, the after-tax cost of reinvested earnings (not newly issued stock) is usually much lower than the after-tax cost of debt.
D) if a company's tax rate increases but the ytm on its noncallable bonds remains the same, the after-tax cost of its debt will fall.
E) when calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred stock dividends are deductible by the paying corporation.
G) D) and E)
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