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- Define each of the following terms: Weighted average cost of capital, WACC; after-tax cost of debt, rd(1 – T); after-tax cost of short-term debt, rstd(1 – T) Cost of preferred stock, rps; cost of common equity (or cost of common stock), rs Target capital structure Flotation cost, F; cost of new external common equity, reSuppose a firm makes the following policy changes listed. If a change means that external, nonspontaneous financial requirements (AFN) will increase, indicate this by a (+); indicate a decrease by a (−); and indicate no effect or an indeterminate effect by a (0). Think in terms of the immediate effect on funds requirements.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
- 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.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? ExplainIn capital budgeting analysis, when computing the weighted average cost of capital, the CAPM approach is typically used to find the component cost of which type of capital? Internal equity. Preference shares. All of these.
- Please answer in CAPITAL LETTER IF IT IS AN INFLOW(I )OR AN OUTFLOW (O)COLUMN 1 , AND COLUMN 2 , IF IT CORRESPONDS TO OPERATINGCASHFLOW(OC),INVESTMENT ACTIVITY CASHFLOW(IC), FINANCING ACTIVITY CASHFLOW ( FC)Example: Reduce marketable securities : I OC ( "I" or "O") AND ("OC", "IC" o "FC" )Activity INFLOW " I" orOutflow "O" OPERATINGCASHFLOW(OC), INVESTMENTACTIVITY CASHFLOW(IC), FINANCINGACTIVITY CASHFLOW ( FC) 1. Purchase of treasurystock2. Purchase of availablefor sale investment 3. Sale of equipment at aloss 4. Increase in accountspayable 5. Retirement of bonds 6. Issuance of bonds 7. Decrease in accountspayable 8. Increase in inventory9. Loan from bank bysigning a note 10. Increase in accountsreceivable 11. Purchase of equipmentby issuing a note 12. Purchase of land andbuilding. 13. Decrease in accountsreceivable.14. Payment of dividends. 15.…Define each of the following terms:a. Capital; capital structure; optimal capital structureb. Business risk; financial riskc. Financial leverage; operating leverage; operating breakevend. Hamada equation; unlevered betae. Symmetric information; asymmetric informationf. Modigliani-Miller theoriesg. Trade-off theory; signaling theoryh. Reserve borrowing capacity; pecking orderi. Windows of opportunity; net debtWhat is the most commonly used capital budgeting procedures? Select one: a. IRR b. Payback period c. Discounted Payback period d. NPV e. Profitability Index
- Describe the six primary capital budgetingdecision criteria. What are their pros andcons, and how are they related to maximizingshareholder wealth? Should managers use just onecriterion, or are there good reasons for using twoor more criteria in the decision process?Use the following information to answer the following question(s). a) What is the percentage of common stock in Sumitomo's weighted average cost of capital? b) What is the percentage of debt in Sumitomo's weighted average cost of capital? c) What is the percentage of preferred stock in Sumitomo's weighted average cost of capital? d) What is the total capital that should be used in computing the weights for Sumitomo's WACC?In proper capital budgeting analysis we evaluate incremental __________ cash flows. Select one: a. accounting b. operating c. before-tax d. financing