# Q2_Solution - FNCE l0l Finance Quiz2 Name Group r D C 6 l l...

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Unformatted text preview: FNCE l0l: Finance Quiz2: Name Group r D C 6. l l . t2. 1 3 . 1 4 . t 5 . 1 6 . 1 7 . 1 8 . 1 9 . 20. L Trpe fka- v 2--T- a J . 4. 5 . 9 C--F c A n € l+ L l. Incorporating flotation costs into the analysis of a project will: A. cause.pJre project to be improperly evaluated.N B. increde the ne]-p+eqent value of the project. Arn=re-a9{hgl19lgtl rate of return. (/fift.cas. the-inJ-tif,icash outflow of the projecr.{ E. have no effect on the present value of the project.; 2. Sam Town Co. 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? , ^ l t1 c . d . e . 3. Which of the followins statements is most correct? A reductiop in the market risk premiu^.n/ An bgrea3Qin the flotation costs associated with issuing new common stock. nnffias-din the company's beta. An ingreag{in expected inflation.- - V - _ - - - - r - - - An increasfin the flotation costs associated with issuing preferred stock. a. All else equal, an increase in a company's stock price will inc6ase the b . r} d . marginal cost of issuing new common equity, k{SEO). An increase in the risk-free rate is likely to dec6ase the marginal costs of both debt and equity financing. All else equal, an increase in a company's stock price will decrease the marginal cost of retained earnings, ks(RE). uz The cost of a new equity issuance (ks(SEO)) could possibly be lower than the cost of retained earnings (ks(RE)) if the market risk premium and risk-free rate decline by a substantial amountrX Statements b and c are correct. 4. Which of the followins statements is most correct? /l lf u company's tax rate increases but the yield to maturity of its noncallable bonds \ remains the same, the company's marginal co;t 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 increate the marginal cost of retained earnings, kr. v c. All else equal, an increase in a company's stock price will incr6ise the marginal cost of issuing new common equity, k". d. Statements a and b are correct. e. Statements b and c are coffect. 5. Which of the following statements about the cost of capital is incorrect? A company's target capital structure affects its weighted average cost of capital." Weighted average cost of capital calculations sho,uld be based on the after-tax costs of all the individual capital components. " If a company's tax.rate increases, then, all else equal, its weighted average cost of capitalwill increa* Flotation coit .un increase the weighted average cost o I capital....
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## This note was uploaded on 01/03/2012 for the course ACTG 211 taught by Professor Galvan during the Spring '11 term at Finger Lakes Community College.

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Q2_Solution - FNCE l0l Finance Quiz2 Name Group r D C 6 l l...

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