A) 11.30%
B) 11.64%
C) 11.99%
D) 12.35%
E) 12.72%
G) A) and B)
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B) False
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A) The "break point" as discussed in the text refers to the point where the firm's tax rate increases.
B) The "break point" as discussed in the text refers to the point where the firm has raised so much capital that it is simply unable to borrow any more money.
C) The "break point" as discussed in the text refers to the point where the firm is taking on investments that are so risky the firm is in serious danger of going bankrupt if things do not go exactly as planned.
D) The "break point" as discussed in the text refers to the point where the firm has raised so much capital that it has exhausted its supply of new retained earnings and thus must raise equity by issuing stock.
E) The "break point" as discussed in the text refers to the point where the firm has exhausted its supply of new retained earnings and thus must begin to finance with preferred stock.
G) A) and B)
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B) False
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A) become riskier over time, but its intrinsic value will be maximized.
B) become less risky over time, and this will maximize its intrinsic value.
C) accept too many low-risk projects and too few high-risk projects.
D) become more risky and also have an increasing WACC. Its intrinsic value will not be maximized.
E) continue as before, because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital.
G) B) and D)
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A) Project B, which is of below-average risk and has a return of 8.5%.
B) Project C, which is of above-average risk and has a return of 11%.
C) Project A, which is of average risk and has a return of 9%.
D) None of the projects should be accepted.
E) All of the projects should be accepted.
G) None of the above
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B) False
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B) False
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A) 9.29%
B) 9.68%
C) 10.08%
D) 10.50%
E) 10.92%
G) A) and D)
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A) Since debt capital can cause a company to go bankrupt but equity capital cannot, debt is riskier than equity, and thus the after-tax cost of debt is always greater than the cost of equity.
B) The tax-adjusted cost of debt is always greater than the interest rate on debt, provided the company does in fact pay taxes.
C) If a company assigns the same cost of capital to all of its projects regardless of each project's risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject.
D) Because no flotation costs are required to obtain capital as retained earnings, the cost of retained earnings is generally lower than the after-tax cost of debt.
E) Higher flotation costs tend to reduce the cost of equity capital.
G) A) and B)
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B) False
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B) False
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A) 10.69%
B) 11.25%
C) 11.84%
D) 12.43%
E) 13.05%
G) B) and E)
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B) False
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A) Since the costs of internal and external equity are related, an increase in the flotation cost required to sell a new issue of stock will increase the cost of retained earnings.
B) Since its stockholders are not directly responsible for paying a corporation's income taxes, corporations should focus on before-tax cash flows when calculating the WACC.
C) An increase in a firm's tax rate will increase the component cost of debt, provided the YTM on the firm's bonds is not affected by the change in the tax rate.
D) When the WACC is calculated, it should reflect the costs of new common stock, retained earnings, preferred stock, long-term debt, short-term bank loans if the firm normally finances with bank debt, and accounts payable if the firm normally has accounts payable on its balance sheet.
E) If a firm has been suffering accounting losses that are expected to continue into the foreseeable future, and therefore its tax rate is zero, then it is possible for the after-tax cost of preferred stock to be less than the after-tax cost of debt.
G) B) and E)
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A) rs > re > rd > WACC.
B) re > rs > WACC > rd.
C) WACC > re > rs > rd.
D) rd > re > rs > WACC.
E) WACC > rd > rs > re.
G) B) and C)
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B) False
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A) 10.77%
B) 11.33%
C) 11.90%
D) 12.50%
E) 13.12%
G) A) and E)
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A) 4.28%
B) 4.46%
C) 4.65%
D) 4.83%
E) 5.03%
G) B) and D)
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A) The WACC is calculated using before-tax costs for all components.
B) The after-tax cost of debt usually exceeds the after-tax cost of equity.
C) For a given firm, the after-tax cost of debt is always more expensive than the after-tax cost of non-convertible preferred stock.
D) Retained earnings that were generated in the past and are reported on the firm's balance sheet are available to finance the firm's capital budget during the coming year.
E) The WACC that should be used in capital budgeting is the firm's marginal, after-tax cost of capital.
G) C) and E)
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