Financial Management and Capital Budgeting

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Chapter 10
Question 1
Marks: 1
Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC)? Choose one answer.
| a. Long-term debt. | |
| b. Accounts payable. | |
| c. Retained earnings. | |
| d. Common stock. | |
| e. Preferred stock. | |
Correct
Marks for this submission: 1/1.
Question 2
Marks: 1
For a typical firm, which of the following sequences is CORRECT? All rates are after taxes, and assume the firm operates at its target capital structure. Choose one answer.
| a. re > rs > WACC > rd. | |
| b. rs > re > rd > WACC. | |
| c. WACC > re > rs > rd. | |
| d. rd > re > rs > WACC. | |
| e. WACC > rd > rs > re. | |
Correct
Marks for this submission: 1/1.
Question 3
Marks: 1
Jackson Inc. uses only equity capital, and it has 2 equally-sized divisions. Division A's cost of capital is 10.0%, Division B's cost is 14.0%, and the composite WACC is 12.0%. All of Division A's projects have the same risk, as do all of Division B's projects. However, the projects in Division A have less risk than those in Division B. Which of the following projects should Jackson accept? Choose one answer.

| a. A Division B project with a 13% return. | |
| b. A Division B project with a 12% return. | |
| c. A Division A project with an 11% return. | |
| d. A Division A project with a 9% return. | |
| e. A Division B project with an 11% return. | |
The correct answer is statement c. Division A should accept only projects with a return greater than 10%, and Division B should accept only projects with a return greater than 14%. Only statement c meets this criterion. Correct

Marks for this submission: 1/1.
Question 4
Marks: 1
Which of the following statements is CORRECT?
Choose one answer.
| a. 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. | | | b. We should use historical measures of the component costs from prior financings when estimating a company's WACC for capital budgeting purposes. | | | c. The cost of new equity (re) could possibly be lower than the cost of retained earnings (rs) if the market risk premium, risk-free rate, and the company's beta all decline by a sufficiently large amount. | | | d. Its cost of retained earnings is the rate of return stockholders require on a firm's common stock. | | | e. The component cost of preferred stock is expressed as rp(1  T), because preferred stock dividends are treated as fixed charges, similar to the treatment of interest on debt. | | Correct

Marks for this submission: 1/1.
Question 5
Marks: 1
Hettenhouse Company's perpetual preferred stock sells for $102.50 per share, and it pays a $9.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in calculating the WACC? Choose one answer.

| a. 9.27% | |
| b. 9.65% | |
| c. 10.04% | |
| d. 10.44% | |
| e. 10.86% | |
Preferred stock price| $102.50|
Preferred dividend| $9.50|
Flotation cost| 4.00%|
rp = Dp/(Pp(1  F))| 9.65%|
| |
Correct
Marks for this submission: 1/1.
Question 6
Marks: 1
Assume that you are a consultant to Magee Inc., and you have been provided with the following data: rRF = 4.00%; RPM = 5.00%; and b = 1.15. What is the cost of equity from retained earnings based on the CAPM approach? Choose one answer.

| a. 9.75% | |
| b. 10.04% | |
| c. 10.34% | |
| d. 10.65% | |
| e. 10.97% | |
rRF| 4.00%|
RPM| 5.00%|
b| 1.15|
rs = rRF + (RPM  b)| 9.75%|
| |
Correct
Marks for this submission: 1/1.
Question 7
Marks: 1
Assume that...
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