Reference no: EM132614271

Problem 1: Which of the following statements is CORRECT?

a. Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC.

b. Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing. However, this action still may raise the company's WACC.

c. Since a firm's beta coefficient it not affected by its use of financial leverage, leverage does not affect the cost of equity.

d. Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its WACC.

e. Increasing a company's debt ratio will typically increase the marginal cost of both debt and equity financing. However, this action still may lower the company's WACC.

Problem 2: Which of the following statements is CORRECT?

a. A firm's business risk is determined solely by the financial characteristics of its industry.

b. A firm's financial risk can be minimized by diversification.

c. The factors that affect a firm's business risk are affected by industry characteristics and economic conditions. Unfortunately, these factors are generally beyond the control of the firm's management.

d. One of the benefits to a firm of being at or near its target capital structure is that this eliminates any risk of bankruptcy.

e. The amount of debt in its capital structure can under no circumstances affect a company's business risk.

Problem 3: Newsome Inc. buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 60 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

a. 36.73%

b. 27.59%

c. 33.39%

d. 30.35%

e. 25.09%