FI 311 Connect homework #10

FI 311 Connect homework #10 - FI 311 Connect homework # 10...

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FI 311 Connect homework # 10 1) Central Systems, Inc. desires a weighted average cost of capital of 9 percent. The firm has an after-tax cost of debt of 6 percent and a cost of equity of 11 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital? .84 .57 .77 .50 .67 WACC = .09 = [W e x .11] + [(1 - W e ) x .06)] W e = .60; W d = 1 - W e = .40 Debt-equity ratio = .40/.60 = .67 Multiple Choice 2) When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach. divisional cost of capital pure play subjective risk security market line capital adjustment Refer to section 14.5 3) The capital structure weights used in computing the weighted average cost of capital: are computed using the book value of the long-term debt and the book value of equity. are based on the market value of the firm's debt and equity securities. remain constant over time unless the firm issues new securities. are restricted to the firm's debt and common stock. are based on the book values of total debt and total equity. Refer to section 14.4
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This note was uploaded on 12/06/2011 for the course FI 311 taught by Professor Booth during the Fall '06 term at Michigan State University.

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FI 311 Connect homework #10 - FI 311 Connect homework # 10...

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