Proportion of debt in firms capital structure

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Reference no: EM132032513

1) Should a project be accepted if it offers an annual after-tax cash flow of $1,500,000 indefintely, cost $10 Million, is riskier than the firms avergae projects, and the firm uses a 15% WACC?

A) No, Since NPV is negative

B) Yes, since a zero NPV indicates a marginal acceptability.

C) yes since NPV is positive.

D) no, SInce NPV is zero

2) An implicit cost of increasing the proportion of debt in a firms capital structure is that?

A) the tax shield will not apply to the added debt.

B) the firm's asset beta will increase

C) equityholders will demand a higher rate of return.

D) the equity-to-value ratio will decrease.

4) When company X has 2 million shares of common stock outstanding at a book value of $2 per share. The stock trades for $2.50 per share. It also has $2 million in face value of debt that trades at 90% of par. What is its ratio of debt to value for WACC purposes?

A) 33.33%

B) 31.08%

C) 28.62%

D) 26.47%

Please either explain or show calculations.

Reference no: EM132032513

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