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Unformatted text preview: FINS1613 BUSINESS FINANCE TUTORIAL WEEK 10 (Based on Lecture 9, RTBWJ Chapters 12 & 15)  Read and ponder on possible solutions to questions under CRITICAL THINKING AND CONCEPTS REVIEW 12.5‐12.9 15.2, 15.8  Solve these problems from Chapters 12 & 15 under QUESTIONS AND PROBLEM Q12.3, Q12.4, Q12.7, Q12.9, Q12.26, Q12.30 Q15.4, Q15.5, Q15.6  Answer the following Multiple‐choice questions 1. Which of the following is not considered a capital component for the purpose of calculating the weighted average cost of capital (WACC) as it applies to capital budgeting? a. Long‐term debt. b. Common stock. c. Accounts payable and accruals. d. Preferred stock. e. None of these answers 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 new common stock. c. An increase in the company's beta. d. An increase in expected inflation. e. An increase in the flotation costs associated with issuing preferred stock. 3. Conglomerate Inc. consists of 2 divisions of equal size, and Conglomerate is 100 percent equity financed. Division A's cost of equity capital is 9.8 percent, while Division B's cost of equity capital is 14 percent. Conglomerate's composite WACC is 11.9 percent. Assume that all Division A projects have the same risk and that all Division B projects have the same risk. However, the projects in Division A are not the same risk as those in Division B. Which of the following 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. ...
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