Which of the following statements is not true about the weighted average cost of capital (WACC) method? O a. WACC adjusts for the tax deductibility of interest costs O b. Average company WACC should not be used for evaluating projects in a multi-segment conglomerate O c. If WACC is greater than the IRR of a project and the cash flows are conventional, then, the NPV of the project will always be less than zero O d. WACC cannot be used to evaluate projects in which the capital structure is significantly different from the firm's overall structure Oe. If WACC is less than IRR of a strip mine project, then, the NPV of the project will always be greater

Which of the following statements is not true about the weighted average cost of capital (WACC) method? O a. WACC adjusts for the tax deductibility of interest costs O b. Average company WACC should not be used for evaluating projects in a multi-segment conglomerate O c. If WACC is greater than the IRR of a project and the cash flows are conventional, then, the NPV of the project will always be less than zero O d. WACC cannot be used to evaluate projects in which the capital structure is significantly different from the firm's overall structure Oe. If WACC is less than IRR of a strip mine project, then, the NPV of the project will always be greater

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Based from the reference below discuss the sunk costs and opportunity cost in a firm.
The Cost of Capital! Check My Work If a firm plans to issue new stock, flotation costs (investment bankers' fees) should not be ignored. There are two approaches to use to account for flotation costs. The first approach is to add the sum of flotation costs for the debt, preferred, and common stock and add them to the initial investment cost. Because the investment cost is increased, the project's expected rate of return is reduced so it may not meet the firm's hurdle rate for acceptance of the project. The second approach involves adjusting the cost of common equity as follows: Cost of equity from new stock =r, = Pe(1-F) +g The difference between the flotation-adjusted cost of equity and the cost of equity calculated without the flotation adjustment represents the flotation cost adjustment. Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $2.40 and it expects dividends to grow at a constant rate g = 4.1%. The firm's current common stock price, Po,…
According to the capital structure trade-off model: O a. The optimal capital structure minimizes the company's weighted average cost of capital. O b. There is no optimal capital structure, but instead there is a hierarchy of sources of capital. O c. There is no optimal capital structure, and companies should aim to maximize debt financing, since they thereby minimize their tax payments. O d. The optimal capital structure minimizes the company's market value. O e. The optimal capital structure minimizes the company's cost of equity.
Which of the following statements is (are) FALSE? Select one or more alternatives: When sales of a new product displace sales of an existing product, the situation is often referred to as cannibalisation. If the IRR of a project is equal to the cost of capital, the NPV will be zero. It is reasonable to assume that a business has a terminal growth rate higher than the long-term growth rate of the economy. The terminal growth rate is the growth rate used to estimate the terminal value of a business. Interest expenses from borrowing should be subtracted from EBIT to estimate free cash flow to firm.
In capital budgeting decisions, are there reasons a company might choose to take a project that was NPV negative? Explain.
Which of the following statements is CORRECT? * A company can use its retained earnings without incurring a flotation cost. As a O result, while the cost of retained earnings is not zero, it is usually less expensive than the after-tax cost of debt. The capital structure that minimizes a company's weighted average cost of capital often maximizes its stock price. The capital structure that minimizes the firm's weighted average cost of capital often maximizes its earnings per share. If everything else is stable, and corporate tax rates drops, the Modigliani-Miller tax- adjusted tradeoff principle implies that companies should expand their use of debt. When a corporation learns that the cost of debt is less than the cost of equity, rising the debt ratio would lower the WACC.
If the present value of a firm's marginal financial distress costs are equal to the present value of its marginal tax shieid, the companySelect one:a.has too much debt in its capital structureb.should increase the amount of debt in ts capital structurec. has an optimal capital structured.shouid reduce the amount of equity in its capital structuree:none of the abovt
Which of the following statements is most correct? Group of answer choices The optimal capital structure maximizes the WACC. None of these. Increasing the amount of debt in a firm's capital structure is likely to increase the cost of both debt and equity financing. If the after-tax cost of equity financing exceeds the after-tax cost of debt financing, firms are always able to reduce their WACC by increasing the amount of debt in their capital structure.
The optimal capital structure for firms in stable industries can reasonably contain ________________ than firms in volatile industries. Select one: A. more debt B. less debt C. an equal amount of debt D. There is no relationship between the cyclical nature of an industry and optimal capital structure
Which of the followings proposes that there is a tradeoff between level of borrowing and benefit of tax shields up a point after which financial distress costs start kicking in? CAPM Static capital structure theory M&M Proposition I M&M Proposition II Pecking order theory Floation cost includes Gross spread Direct expenses Indirect expenses Abnormal returns All of above Which one of the followings states that the value of a firm is unrelated to the firm's capital structure? Capital Asset Pricing Model M&M Proposition I M&M Proposition II Law of One Price Efficient Markets Hypothesis
i Explain how wrong calculation of the cost of capital of a project leads toincorrect choice of a project. ii Explain the superiority of the Security Market Line (SML) approach ascompared to the dividend valuation model. iii A company is faced with the choice of one of two investment opportunities Aand B. The initial cost of each is Rs.200,000 and their estimated cash flows areas follows.Year Cash Flows (Rs.) – A Cash Flows (Rs.)- B1 200,000 40,0002 240,000 60,000Assuming a cost of capital of 7% calculate (year 1: .935; year 2: .873)a. NPVb. The yield rate of each projectc. Say which project you would select
Which of the following is most correct about the cost of capital? The cost of debt reflects the interest rates on debt capital before taking into account the tax effects. Cost of capital is affected by the required rates of return of each of the source of capital, regardless of the capital structure. The capital asset pricing model is the most widely used model to estimate the cost of common equity. To minimize the cost of capital, firms should borrow more than their capacity because increasing the lower cost of debt yields the lowest cost of capital, thus, enhances shareholder value.

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