Question 1

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

Accepted Answer

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

Question 2

An increase in a firm's debt ratio will have no effect on the required rate of return for equity holders.

Accepted Answer

A) True 
 B)False

Question 3

The weighted-average cost of capital is the expected rate of return on a portfolio of all the firm's securities,adjusted for the tax savings on interest payments.

Accepted Answer

A) True 
 B)False

Question 4

The weighted-average cost of capital for a firm with a 65/35 debt/equity split,8% pre-tax cost of debt,15% cost of equity,and a 35% tax rate is:

Accepted Answer

A)  8.63%. 
B)  9.12%. 
C)  10.45%. 
D)  13.80%.

Question 5

Assume a firm's debt is selling at face value.What is the firm's cost of debt if the debt has a coupon rate of 7.5% and the tax rate is 35%?

Accepted Answer

A)  4.88% 
B)  4.97% 
C)  5.21% 
D)  5.35%

Question 6

How much cash flow before tax and interest is necessary to support a project if $2 million is used to pay interest,the tax rate is 35%,and equity investors require annual income of $4 million?

Accepted Answer

A)  $7.40 million 
B)  $8.10 million 
C)  $8.15 million 
D)  $8.85 million

Question 7

The company cost of capital is the minimum acceptable rate of return for any project the firm undertakes.

Accepted Answer

A) True 
 B)False

Question 8

As debt is added to the capital structure,the:

Accepted Answer

A)  WACC will continually decline. 
B)  WACC will continually increase. 
C)  cost of debt can be expected to rise. 
D)  WACC will be unaffected.

Question 9

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 10

To a company,the cost of interest payments on its bonds is reduced by the amount of tax savings generated by that interest.

Accepted Answer

A) True 
 B)False

Question 11

Which one of the following changes would tend to increase the WACC for a tax-paying firm?

Accepted Answer

A)  Decrease the proportion of equity financing 
B)  Increase the market value of the debt 
C)  Decrease the proportion of debt financing 
D)  Decrease the market value of the equity

Question 12

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

Accepted Answer

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

Question 13

What equity proportion should be used when calculating WACC for a firm with $50 million in debt selling at 85% of par,$50 million in book value of equity,and $65 million in market value of equity?

Accepted Answer

A)  50.00% 
B)  54.18% 
C)  56.55% 
D)  60.47%

Question 14

Which one of the following statements is incorrect?

Accepted Answer

A)  The equity component of WACC reflects the return expected by the company's shareholders. 
B)  Market values should be used in calculating WACC. 
C)  Preferred equity is a separate component of WACC. 
D)  There is a tax shield on the equity dividends paid.

Question 15

For purposes of computing the WACC,if the book value of equity exceeds the market value of equity,then:

Accepted Answer

A)  the book value of equity should be used. 
B)  the book value of equity less retained earnings should be used. 
C)  the market value of equity should be used. 
D)  the market value of equity less retained earnings should be used.

Question 16

What is a firm's weighted-average cost of capital for a firm that is financed 45% by debt? The debt has a 10% required return and the equity has a 17% required return.The tax rate is 35%.

Accepted Answer

A)  13.85% 
B)  12.28% 
C)  13.50% 
D)  9.00%

Question 17

The WACC is the rate of return that the firm must expect to earn on its average-risk investments in order to provide an acceptable return to its security holders.

Accepted Answer

A) True 
 B)False

Question 18

Assuming a project has the same risk and financing as the firm,it will have a positive NPV if its rate of return is greater than the firm's WACC.

Accepted Answer

A) True 
 B)False

Question 19

New projects should be undertaken by firms only if they have the same risk as existing assets.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

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

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

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

An increase in a firm's debt ratio will have no effect on the required rate of return for equity holders.

The weighted-average cost of capital is the expected rate of return on a portfolio of all the firm's securities,adjusted for the tax savings on interest payments.

The weighted-average cost of capital for a firm with a 65/35 debt/equity split,8% pre-tax cost of debt,15% cost of equity,and a 35% tax rate is:

Assume a firm's debt is selling at face value.What is the firm's cost of debt if the debt has a coupon rate of 7.5% and the tax rate is 35%?

How much cash flow before tax and interest is necessary to support a project if $2 million is used to pay interest,the tax rate is 35%,and equity investors require annual income of $4 million?

The company cost of capital is the minimum acceptable rate of return for any project the firm undertakes.

As debt is added to the capital structure,the:

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?

To a company,the cost of interest payments on its bonds is reduced by the amount of tax savings generated by that interest.

Which one of the following changes would tend to increase the WACC for a tax-paying firm?

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

What equity proportion should be used when calculating WACC for a firm with $50 million in debt selling at 85% of par,$50 million in book value of equity,and $65 million in market value of equity?

Which one of the following statements is incorrect?

For purposes of computing the WACC,if the book value of equity exceeds the market value of equity,then:

What is a firm's weighted-average cost of capital for a firm that is financed 45% by debt? The debt has a 10% required return and the equity has a 17% required return.The tax rate is 35%.

The WACC is the rate of return that the firm must expect to earn on its average-risk investments in order to provide an acceptable return to its security holders.

Assuming a project has the same risk and financing as the firm,it will have a positive NPV if its rate of return is greater than the firm's WACC.

New projects should be undertaken by firms only if they have the same risk as existing assets.

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