Financial Management and Capital Budgeting

7447 WordsNov 27, 201130 Pages
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…show more content…
Choose one answer. | a. 9.08% | | | b. 9.56% | | | c. 10.06% | | | d. 10.56% | | | e. 11.09% | | D1 | $1.30 | P0 | $42.50 | g | 7.00% | rs = D1/P0 + g | 10.06% | | | Correct Marks for this submission: 1/1. Question 8 Marks: 1 P. Lange Inc. hired your consulting firm to help them estimate the cost of equity. The yield on Lange's bonds is 7.25%, and your firm's economists believe that the cost of equity can be estimated using a risk premium of 3.50% over a firm's own cost of debt. What is an estimate of Lange's cost of equity from retained earnings? Choose one answer. | a. 10.75% | | | b. 11.18% | | | c. 11.63% | | | d. 12.09% | | | e. 12.58% | | Bond yield | 7.25% | Risk premium | 3.50% | re = rd + Risk Premium | 10.75% | | | Correct Marks for this submission: 1/1. Question 9 Marks: 1 To help finance a major expansion, Delano Development Company sold a noncallable bond several years ago that now has 15 years to maturity. This bond has a 10.25% annual coupon, paid semiannually, it sells at a price of $1,025, and it has a par value of $1,000. If Delano's tax rate is 40%, what component cost of debt should be used in the WACC calculation? Choose one answer. | a. 5.11% | | | b. 5.37% | | | c. 5.66% | | | d. 5.96% | | | e. 6.25% | | Coupon rate | 10.25% | Periods/year | 2 | Maturity (yr) | 15 | Bond price | $1,025.00 | Par value | $1,000 | Tax rate |
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