Q1. Henly Inc.. has no retained earnings since it has always paid out all of its earnings as dividends. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC?
The market risk premium declines.
The flotation costs associated with issuing new common stock increase.
The company's beta increases.
Expected inflation increases.
The flotation costs associated with issuing preferred stock increase.
Q2. KT corp.. has no debt or preferred stock, it uses only equity capital, and has two equally-sized divisions. Division X's cost of capital is 10.0%, Division Y's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division X's projects are equally risky, as are all of Division Y's projects. However, the projects of Division X are less risky than those of Division Y. Which of the following projects should the firm accept?
A Division X project with an 11% return.
A Division Y project with a 12% return.
A Division X project with a 9% return.
A Division Y project with an 11% return.
A Division Y project with a 13% return.
Q3. Bigbike Inc. is a no-growth firm whose sales fluctuate seasonally, causing total assets to vary from $315,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital?
Q4. Billy Inc. has the following data. What is the firm's cash conversion cycle?
Inventory conversion period = 80 days
Average collection period = 36 days
Payable deferral period = 20 days