Exam3F07R - Exam3F07 Multiple Choice Identify the choice...

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Exam3F07 Multiple Choice Identify the choice that best completes the statement or answers the question. Chapter 14 ____ 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. Chapter 14 ____ 2. Which of the following statements is most correct? a. If a company's tax rate increases but the yield to maturity of its noncallable bonds remains the same, the company's marginal cost of debt capital used to calculate its weighted average cost of capital will fall. b. All else equal, an increase in a company's stock price will increase the marginal cost of retained earnings, r s . c. All else equal, an increase in a company's stock price will increase the marginal cost of issuing new common equity, r e . d. All of these statements are correct. Chapter 14 ____ 3. Which of the following statements is most correct? a. The WACC measures the pre-tax cost of capital. b. The WACC measures the marginal cost of capital. c. There is no cost associated with using retained earnings. d. All of these statements are correct. Not covered in the Ross textbook ____ 4. Dandy Product's overall weighted average required rate of return is 10 percent. Its yogurt division is riskier than average, its fresh produce division has average risk, and its institutional foods division has below- average risk. Dandy adjusts for both divisional and project risk by adding or subtracting 2 percentage points. Thus, the maximum adjustment is 4 percentage points. What is the risk-adjusted required rate of return for a low-risk project in the yogurt division? a. 6% b. 8% c. 10%e d. 12% e. 14% Chapter 14 ____ 5. Dobson Dairies has a capital structure that consists of 60 percent long-term debt and 40 percent common stock. The company's CFO has obtained the following information: The before-tax yield to maturity on the company's bonds is 8 percent. The company's common stock is expected to pay a $3.00 dividend at year end (D 1 = $3.00), and the dividend is expected to grow at a constant rate of 7 percent a year. The common stock currently sells for $60 a share. The firm uses the cost of new equity to calculate the cost of equity. Its flotation costs are 10%. The company's tax rate is 40 percent.
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What is the company's weighted average cost of capital (WACC)? a. 12.6% b. 8.03% c. 9.34% d. 7.9% e. 7.68% Chapter 9 ____ 6. Sacramento Paper is considering two mutually exclusive projects. Project A has an internal rate of return (IRR) of 12 percent, while Project B has an IRR of 14 percent. The two projects have the same risk, and when the cost of capital is 7 percent the projects have the same net present value (NPV). Assume each project has an initial cash outflow followed by a series of inflows. Given this information, which of the following statements is most correct? a.
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Exam3F07R - Exam3F07 Multiple Choice Identify the choice...

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