Cost of Capital - Solutions2

Cost of Capital - Solutions2 - A. B. * C. D. E. 5. Select...

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Old Exam Questions - Cost of Capital - Solutions Page 4 of 42 Pages A. Since most stock is privately placed, a firm’s required rate of return for a new issue of common stock will be equal to the investors’ required rate of return for that same issue. B. The WACC represents the historical cost of capital and is usually calculated on a before-tax basis. * C. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are tax deductible. D. Since the money is readily available, the cost of retained earnings is usually a lot cheaper than the cost of debt financing. E. When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred stock dividends are tax deductible. 5. Select the statement that is most correct . A. When a bond’s coupon rate is greater than its yield to maturity, the coupon rate should be used as the firm’s before-tax cost of debt. * B. All other things equal (including component costs), a higher tax rate will lower a firm’s WACC only if the firm uses debt financing. C. While higher-than-average risk projects require discounting cash flows at a rate above the firm’s WACC, it is usually not appropriate to discount lower-than- average risk projects at a rate below the firm’s WACC. D. Even if project risks vary widely within a firm, a project’s cash flows should always be discounted at the corporate cost of capital (WACC). E. Because of the sheer size of large, publicly traded firms, it is more difficult to use the CAPM to estimate their cost of equity than to estimate it for small, privately held firms. 6. Which of the following statements is most correct ? A.
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Cost of Capital - Solutions2 - A. B. * C. D. E. 5. Select...

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