Find correct answer on weighted average cost of capital

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Reference no: EM1315646

1) Campbell Co. is trying to estimate its weighted average cost of capital (WACC). Which of the following statements is most correct?

a. The after-tax cost of debt is generally cheaper than the after-tax cost of preferred stock.

b. Since retained earnings are readily available, the cost of retained earnings is generally lower than the cost of debt.

c. If the company\'s beta increases, this will increase the cost of equity financing, even if the company is able to rely on only retained earnings for its equity financing.

d. Statements a and b are correct.

e. Statements a and c are correct.

2) Wyden Brothers has no retained earnings. The company uses the CAPM to calculate the cost of equity capital. The company's capital structure consists of common stock, preferred stock, and debt. Which of the following events will reduce the company's WACC?

a. A reduction in the market risk premium.

b. An increase in the flotation costs associated with issuing newcommon stock.

c. An increase in the company\'s beta.

d. An increase in expected inflation.

e. An increase in the flotation costs associated with issuingpreferred stock.

3) A company has a capital structure that consists of 50 percent debtand 50 percent equity. Which of the following statements is mostcorrect?

a. The cost of equity financing is greater than or equal to thecost of debt financing.

b. The WACC exceeds the cost of equity financing.

c. The WACC is calculated on a before-tax basis.

d. The WACC represents the cost of capital based on historicalaverages. In that sense, it does not represent the marginal cost ofcapital.

e. The cost of retained earnings exceeds the cost of issuing newcommon stock.

4)A company estimates that an average-risk project has a WACC of 10percent, a below-average risk project has a WACC of 8 percent, and an above-average risk project has a WACC of 12 percent. Which of thefollowing independent projects should the company accept?

a. Project A has average risk and a return of 9 percent.

b. Project B has below-average risk and a return of 8.5 percent.

c. Project C has above-average risk and a return of 11 percent.

d. All of the projects above should be accepted.

e. None of the projects above should be accepted.

5)Conglomerate Inc. consists of 2 divisions of equal size, andConglomerate is 100 percent equity financed. Division A's cost ofequity capital is 9.8 percent, while Division B's cost of equitycapital is 14 percent. Conglomerate's composite WACC is 11.9 percent.Assume that all Division A projects have the same risk and that allDivision B projects have the same risk. However, the projects inDivision A are not the same risk as those in Division B. Which of thefollowing projects should Conglomerate accept?

a. Division A project with an 11 percent return.

b. Division B project with a 12 percent return.

c. Division B project with a 13 percent return.

d. Statements a and c are correct.

e. Statements b and d are correct.

Reference no: EM1315646

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