Cost of a capital component rises

Reference no: EM131015592

Please guys answer all the following questions.

1. A firm must earn the marginal cost of capital on new investments if it is to meet the return requirements of all investors.

True

False

2) A breakpoint will occur in the MCC schedule whenever the cost of a capital component rises.

True

False

3) The cost of retained earnings can be less than, equal to, or greater than the cost of new common stock, depending on taxes, flotation costs, investorsAc€?c attitudes, etc.

True

False

4) Santorum Co. has a capital structure of 50% debt, 20% preferred stock, and 30% common stock. Net income is forecast to be $1,000,000. The company pays out 40% of its earnings as dividends. How much new capital can the firm raise without having to issue new cotnmon shares or change its capital structure? (That is, what is the breakpoint associated with retained earnings?)

a. $180,000

b. $200,000

c. $600,000

d. $1,200,000

e. $2,000,000

5. A company has determined that its optimal capital structure consists of 40% debt and 60% equity. The before- tax cost of debt is 10%; the tax rate is 40%. The costs of retained earnings and new common shares are 8.00% and 9.41%, respectively. Net income is expected to be $40,000, and the dividend payout ratio is 50%. When the firmAc€?cs capital budget is $40,000, its weighted average cost of capital is:

a. 7.20%.

b. 8.05%.

c. 11.81%.

d. 13.69%.

e. 14.28%.

6) Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not relevant.

True

False

7. If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land.

True

False

8)Any cash flow that cannot be classified as incremental is relevant in a capital budgeting project analysis.

True

False

9) In cash flow estimation, the presence of externalities has no direct cash flow effects.

True

False

Reference no: EM131015592

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