Question 1

A proposed project has a positive NPV when evaluated at the company cost of capital.If the firm employs debt in its capital structure,will the project remain acceptable after evaluation with the WACC?

Accepted Answer

A)  Yes, using the WACC will increase the NPV. 
B)  No, using the WACC will decrease the NPV. 
C)  the project may now become unacceptable. 
D)  there will be no change in the project's NPV.

Question 2

How would a company's cost of capital calculated from book values be affected if the company's bonds were selling for more than face value?

Accepted Answer

A)  the cost of capital would increase. 
B)  the cost of capital would decrease. 
C)  the cost of capital would not be affected. 
D)  the effect depends on the bonds' coupon rate.

Question 3

To the company,the cost of interest payments on bonds (issued debt)is reduced by the amount of tax savings.

Accepted Answer

A) True 
 B)False

Question 4

If a company's cost of capital is less than the required return on equity,then the firm:

Accepted Answer

A)  is financed with more than 50% debt. 
B)  is perceived to be safe. 
C)  has debt in its capital structure. 
D)  cannot be using any debt.

Question 5

The riskiness of equity securities typically exceeds that of debt securities for firms.

Accepted Answer

A) True 
 B)False

Question 6

How much will a firm need in cash flow before tax and interest to satisfy debt holders and equity holders if: the tax rate is 35%,there is $13 million in common stock requiring a 10% return,and $6 million in bonds requiring an 6% return?

Accepted Answer

A)  $1,392,000 
B)  $1,488,000 
C)  $2,360,000 
D)  $2,480,000

Question 7

What is the WACC for a firm with 50% debt and 50% equity that pays 12% on its debt,20% on its equity,and has a 40% tax rate?

Accepted Answer

A)  9.6% 
B)  12.0% 
C)  13.6% 
D)  16.0%

Question 8

The capital structure for the CR Corporation is the following: bonds $5,500,and common stock $11,000.If CR has an after-tax cost of debt of 6%,and a 16% cost of common stock,what is its WACC?

Accepted Answer

A)  9.33% 
B)  12.67% 
C)  13.33% 
D)  14.67%

Question 9

With respect to issues related to the cost of capital:

Accepted Answer

A)  an increase in the debt ratio will result in greater risk for debt holders but not equity holders. 
B)  the cost of capital is the return a firm must earn before tax to satisfy security holders. 
C)  the WACC is the correct discount rate for average-risk projects. 
D)  the expected return on equity is relevant to capital budgeting decisions.

Question 10

For most healthy firms,the YTM on their bonds is the rate of return investors expect from holding their bonds.

Accepted Answer

A) True 
 B)False

Question 11

Why can it be incorrect to evaluate all capital budgeting proposals at the firm's current weighted-average cost of capital?

Accepted Answer

The answer of Why can it be incorrect to evaluate...

Question 12

For a firm that pays no corporate taxes,changing its capital structure will:

Accepted Answer

A)  change the total cash it pays out to investors. 
B)  change the risk of the cash flows. 
C)  change both the cash flows and the risk of the cash flows. 
D)  not affect the cash flows nor the risk of the cash flows.

Question 13

How much will a firm need in cash flow before tax and interest to satisfy debt holders and equity holders if: the tax rate is 40%,there is $10 million in common stock requiring a 12% return,and $6 million in bonds requiring an 8% return?

Accepted Answer

A)  $1,392,000 
B)  $1,488,000 
C)  $2,480,000 
D)  $2,800,000

Question 14

What decision should be made on a project of above-average risk if the project's IRR exceeds the WACC?

Accepted Answer

A)  accept the project; NPV is positive. 
B)  reject the project; NPV is negative. 
C)  decide after discounting at the IRR. 
D)  decide after discounting at an appropriate rate.

Question 15

The weighted-average cost of capital is the return the company needs to earn after tax in order to satisfy all its security holders.

Accepted Answer

A) True 
 B)False

Question 16

If a firm has twice as much equity as debt in its capital structure,then the firm has:

Accepted Answer

A)  75.0% debt 
B)  66.7% equity 
C)  40.0% debt 
D)  33.3% equity

Question 17

Why are investors interested in free cash flow?

Accepted Answer

The answer of Why are investors interested in free cash...

Question 18

Projects that have a zero NPV when calculated at the WACC will provide sufficient returns to all stakeholders.

Accepted Answer

A) True 
 B)False

Question 19

Company X has 2 million shares of common stock outstanding at a book value of $2 per share.The stock trades for $3.00 per share.It also has $2 million in face value of debt that trades at 90% of par.What is its ratio of debt to value for WACC purposes?

Accepted Answer

A)  23.08% 
B)  28.6% 
C)  31.0% 
D)  33.3%

Question 20

Which of the following statements is true?

Accepted Answer

A)  the cost of equity is more difficult to derive than the cost of preferred shares. 
B)  the firm's shares will not be bid up if the firm does not pay dividends. 
C)  The DDM cannot be used to value companies who do not pay dividends. 
D)  equity financing will provide the corporation with a tax shield.

Exam 13: The Weighted-Average Cost of Capital and Company Valuation

A proposed project has a positive NPV when evaluated at the company cost of capital.If the firm employs debt in its capital structure,will the project remain acceptable after evaluation with the WACC?

How would a company's cost of capital calculated from book values be affected if the company's bonds were selling for more than face value?

To the company,the cost of interest payments on bonds (issued debt)is reduced by the amount of tax savings.

If a company's cost of capital is less than the required return on equity,then the firm:

The riskiness of equity securities typically exceeds that of debt securities for firms.

How much will a firm need in cash flow before tax and interest to satisfy debt holders and equity holders if: the tax rate is 35%,there is $13 million in common stock requiring a 10% return,and $6 million in bonds requiring an 6% return?

What is the WACC for a firm with 50% debt and 50% equity that pays 12% on its debt,20% on its equity,and has a 40% tax rate?

The capital structure for the CR Corporation is the following: bonds $5,500,and common stock $11,000.If CR has an after-tax cost of debt of 6%,and a 16% cost of common stock,what is its WACC?

With respect to issues related to the cost of capital:

For most healthy firms,the YTM on their bonds is the rate of return investors expect from holding their bonds.

Why can it be incorrect to evaluate all capital budgeting proposals at the firm's current weighted-average cost of capital?

For a firm that pays no corporate taxes,changing its capital structure will:

How much will a firm need in cash flow before tax and interest to satisfy debt holders and equity holders if: the tax rate is 40%,there is $10 million in common stock requiring a 12% return,and $6 million in bonds requiring an 8% return?

What decision should be made on a project of above-average risk if the project's IRR exceeds the WACC?

The weighted-average cost of capital is the return the company needs to earn after tax in order to satisfy all its security holders.

If a firm has twice as much equity as debt in its capital structure,then the firm has:

Why are investors interested in free cash flow?

Projects that have a zero NPV when calculated at the WACC will provide sufficient returns to all stakeholders.

Company X has 2 million shares of common stock outstanding at a book value of $2 per share.The stock trades for $3.00 per share.It also has $2 million in face value of debt that trades at 90% of par.What is its ratio of debt to value for WACC purposes?

Which of the following statements is true?