Chapter 10 cost of capital conceptual questions page

Chapter 10: Cost of Capital Conceptual Questions Page 319
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e. Reduce the percentage of debt in the target capital structure.
(10.11) Factors affecting WACC Answer: a EASY
27
. Schalheim Sisters Inc. has always paid out all of its earnings as
dividends, and hence has no retained earnings. This same situation is
expected to persist in the future. The company uses the CAPM to
calculate its cost of equity. Its target capital structure consists of
common stock, preferred stock, and debt. Which of the following events
would reduce the WACC?
28
. When working with the CAPM, which of the following factors can be
determined with the most precision?
29
. Jackson Inc. uses only equity capital, and it has 2 equally-sized
divisions. Division A’s cost of capital is 10.0%, Division B’s cost is
14.0%, and the composite WACC is 12.0%. All of Division A’s projects
have the same risk, as do all of Division B's projects. However, the
projects in Division A have less risk than those in Division B. Which
of the following projects should Jackson accept?