Financial Management and Capital Budgeting

Chapter 10
Question 1
Marks: 1
Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC)?
Choose one answer. | a. Long-term debt. | | | b. Accounts payable. | | | c. Retained earnings. | | | d. Common stock. | | | e. Preferred stock. | |
Correct
Marks for this submission: 1/1.
Question 2
Marks: 1
For a typical firm, which of the following sequences is CORRECT? All rates are after taxes, and assume the firm operates at its target capital structure.
Choose one answer. | a. re > rs > WACC > rd. | | | b. rs > re > rd > WACC. | | | c. WACC > re > rs > rd. | | | d. rd > re > rs > WACC. | | | e. WACC > rd > rs > re. | |
Correct
Marks for this submission: 1/1.
Question 3
Marks: 1
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?
Choose one answer. | a. A Division B project with a 13% return. | | | b. A Division B project with a 12% return. | | | c. A Division A project with an 11% return. | | | d. A Division A project with a 9% return. | | | e. A Division B project with an 11% return. | |
The correct answer is statement c. Division A should accept only projects with a return greater than 10%, and Division B should accept only projects with a return greater than 14%. Only statement c meets this criterion.
Correct
Marks for this submission: 1/1.
Question 4
Marks: 1
Which of the following statements is CORRECT?
Choose one answer. | a. In the WACC calculation, we must adjust the cost of preferred stock (the market yield) to reflect the fact that 70% of the dividends