Question 1

Interest tax shields are available to the firm on debt and preferred stock but not on common equity.

Accepted Answer

A) True 
 B)False

Question 2

XYZ Company issues common stock at a price of $25 a share. The firm expects to pay a dividend of $2.20 a share next year. If the dividend is expected to grow at 2.5% annually, what is XYZ's cost of common equity?

Accepted Answer

A)  6.3% 
B)  11.3% 
C)  13.7% 
D) 8.9%

Question 3

What happens when the capital structure of a firm changes?

Accepted Answer

The answer of What happens when the capital structure of...

Question 4

If a project has a zero NPV when the expected cash flows are discounted at the weighted-average cost of capital, then the project's cash flows are just sufficient to give debtholders and shareholders the return they require.

Accepted Answer

A) True 
 B)False

Question 5

When using the WACC as a discount rate, it is often adjusted upward for riskier projects and downward for safer projects.

Accepted Answer

A) True 
 B)False

Question 6

Al's Market plans to close after 3 more years. The firm expects to have free cash flows of $148,000 next year, $128,000 in Year 2, and $65,000 in Year 3 after incurring the costs of closing. The firm's cost of equity is 15.5% and its cost of debt is 6.2%. What is the present value of the firm if its debt to value ratio is 30%?

Accepted Answer

A)  $312,020 
B)  $248,915 
C)  $277,467 
D) $301,004

Question 7

A proposed capital project will cost $20 million and generate $4 million annually in after-tax cash flows for 10 years. The cost of capital for a project of this risk level is 12.2%. Should the project be accepted? Why or why not?

Accepted Answer

The answer of A proposed capital project will cost $20...

Question 8

For a company that pays no corporate taxes, its WACC will be equal to:

Accepted Answer

A)  the expected return on it assets. 
B)  the expected return on its debt. 
C)  the total value of its assets. 
D) the expected return on its equity.

Question 9

A firm's cost of capital should be used as the discount rate for every new project the firm considers.

Accepted Answer

A) True 
 B)False

Question 10

Calculate a firm's WACC given that the total value of the firm is $2 million, $600,000 of which is debt, the pre-tax cost of debt is 10%, and the cost of equity is 15%. The firm pays no taxes.

Accepted Answer

A)  9.0% 
B)  11.5% 
C)  13.5% 
D) 14.4%

Question 11

What would you estimate as the cost of equity if a stock sells for $40, pays a $4.25 dividend, and is expected to grow at a constant rate of 5%?

Accepted Answer

A)  17.46% 
B)  14.52% 
C)  12.69% 
D) 15.63%

Question 12

Can WACC ever be used to value an entire business?

Accepted Answer

The answer of Can WACC ever be used to value...

Question 13

The company cost of capital is the return that is expected on a portfolio of the company's:

Accepted Answer

A)  existing securities. 
B)  equity securities. 
C)  debt securities. 
D) proposed securities.

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

Interest tax shields are available to the firm on debt and preferred stock but not on common equity.

XYZ Company issues common stock at a price of $25 a share. The firm expects to pay a dividend of $2.20 a share next year. If the dividend is expected to grow at 2.5% annually, what is XYZ's cost of common equity?

What happens when the capital structure of a firm changes?

If a project has a zero NPV when the expected cash flows are discounted at the weighted-average cost of capital, then the project's cash flows are just sufficient to give debtholders and shareholders the return they require.

When using the WACC as a discount rate, it is often adjusted upward for riskier projects and downward for safer projects.

A proposed capital project will cost $20 million and generate $4 million annually in after-tax cash flows for 10 years. The cost of capital for a project of this risk level is 12.2%. Should the project be accepted? Why or why not?

For a company that pays no corporate taxes, its WACC will be equal to:

A firm's cost of capital should be used as the discount rate for every new project the firm considers.

Calculate a firm's WACC given that the total value of the firm is $2 million, $600,000 of which is debt, the pre-tax cost of debt is 10%, and the cost of equity is 15%. The firm pays no taxes.

What would you estimate as the cost of equity if a stock sells for $40, pays a $4.25 dividend, and is expected to grow at a constant rate of 5%?

Can WACC ever be used to value an entire business?

The company cost of capital is the return that is expected on a portfolio of the company's: