The WACC is a weighted average of the costs of debt, preferred stock, and common equity. Would the WACC be different if the equity for the coming year came solely in the form of retained earnings versus some equity from the sale of new common stock? Would the calculated WACC depend in any way on the size of the capital budget?

The WACC is a weighted average of the costs of debt, preferred stock, and common equity. Would the WACC be different if the equity for the coming year came solely in the form of retained earnings versus some equity from the sale of new common stock? Would the calculated WACC depend in any way on the size of the capital budget?

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Description: The WACC is a weighted average of the costs of debt, preferred stock, and common equity. Would the WACC be different if the equity for the coming year came solely in the form of retained earnings versus some equity from the sale of new common stock?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 5P

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The WACC is a weighted average of the costs of debt, preferred stock, and common equity.Would the WACC be different if the equity for the coming year came solely in the form ofretained earnings versus some equity from the sale of new common stock? Would the calculatedWACC depend in any way on the size of the capital budget? How might dividendpolicy affect the WACC?
Explain the following: The WACC is a weighted average of the costs of debt, preferred stock, and common equity.Would the WACC be different if the equity for the coming year came solely in the formof retained earnings versus some equity from the sale of new common stock? Would thecalculated WACC depend in any way on the size of the capital budget? How mightdividend policy affect the WACC? Assume that the risk-free rate increases. What impact would this have on the cost of debt?What impact would it have on the cost of equity? Note: Explain Shortly And To the Point Answer
The WACC is a weighted average of the costs of debt, preferred stock, and common equity. How should the capital structure weights used to calculate the WACC be determined? Would the WACC depend in any way on the size of the capital budget? How might dividend policy affect WACC? Explain
. If the company’s capital budgeting analyst decidedto show all projected cash flows, both positive andnegative, in current dollars rather than inflationadjusted dollars, would this affect the calculatedNPV?
With everything else held constant, which of the following events should increase the internal rate of return of a capital budgeting project? A. An increase in the cost of the asset. B. A decrease in the firm’s cost of capital. C. A decrease in the cost of operating the asset. D. A decrease in tax benefits.
Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting? a. Accounts payable. b. Preferred stock. c. Common stock raised by new issues. d. Long-term debt. e. Common stock "raised" by reinvesting earnings.
Which of the following statement about the payback period method for capital budgeting decisions is not correct? The paybackperiod method ignores the time valueof money. A shorter payback period does not always mean that one investment is more desirable than another. When the annual net cash inflow isthe same each year, the payback period = Investment required/Annual netcash inflow. When the net cash flows change from year to year, the payback period = Investment required/Average netcash inflow per year.
Suppose instead, Evergreen uses a retention ratio of 30%. Their capital budget for the upcoming year = $1,600,000. Calculate the debt, external equity financing required and the dividends per share.
Capital budgeting whose returns are expected to extend beyond one year requires an analysis of some factors.What are those factors and explain
All of the following are data rules associated with capital budgeting EXCEPT: a. Include changes across the full life cycle of the product or service. b. Include changes in every functional area of the business. c. Include financing flows in the cash flows of all proposed projects. d. Include forecasted inflation in the cash flow estimates.
The WACC as used in capital budgeting is an estimate of a company’s before-tax cost of capital. True False
Which of the following statements are correct? Preferred equities are separate form common equities Opportunity cost should not be included in the capital budgeting decision Retained earnings are important in calculating the WACC Weights for equity in the WACC calculation are always on book values Cash from net working capital for each year is defined as NWCn- NWCn-1