Finance Questions
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Which of the following changes offer the greatest chance of changing a project's NPV from negative to positive? A. Substituting preferred stock for debtB. Selling the debt at less than par valueC. Reducing project riskD. Decreasing the marginal tax rate
What is the WACC for a firm with equal amounts of debt and equity financing, a 17% before-tax company cost of capital, a 35% tax rate, and a 10% coupon rate on its debt that is selling at par value? A. 10.40%B. 14.25%C. 15.25%D. 16.00%
What percentage of value should be allocated to equity in WACC computations for a firm with $50 million in debt selling at 85% of par, $50 million in book value of equity, and $65 million in market value of equity? A. 50.0%B. 54.1%C. 56.5%D. 60.5%
What is the after-tax cost of preferred stock that pays a 12% dividend and sells at par if the firm's tax rate is 35%? A. 7.8%B. 8.5%C. 12.0%D. 16.2%
Which of the following statements is correct for a firm that is 55% debt-financed and the value of equity equals $58 million? A. The firm is valued at approximately $105 million.B. The firm is valued at approximately $129 million.C. The debt is valued at approximately $32 million.D. The debt is valued at approximately $68 million.
In general, equity is considered a _____ investment than debt, because payments on debt are _____. A. safer; lowerB. safer; less certainC. riskier; guaranteed by the companyD. riskier; guaranteed by the federal government
Debt financing is made up of explicit and implicit costs that refer to: A. a higher required ROE and the interest rate bondholders demand, respectively.B. the interest rate bondholders demand and a higher required ROE, respectively.C. the costs of equity and debt, respectively.D. the costs of issuing bonds and the interest rate bondholders demand, respectively.
For a company that pays no corporate taxes, its WACC will be equal to: A. the expected return on it assets.B. the expected return on its debt.C. the total value of its assets.D. the expected return on its equity.
The company cost of capital is the return that is expected on a portfolio of the company's: A. existing securities.B. equity securities.C. debt securities.D. proposed securities.
What is the WACC for a firm using 55% equity with a required return of 15%, 35% debt with a required return of 8%, 10% preferred stock with a required return of 10%, and a tax rate of 35%? A. 10.72%B. 11.07%C. 11.70%D. 12.05%
A project will generate $1 million net cash flow annually in perpetuity. If the project costs $7 million, what is the lowest WACC shown below that will make the NPV negative? A. 10%B. 12%C. 14%D. 16%
What proportion of a firm is equity financed if the WACC is 14%, the after-tax cost of debt is 7.0%, the tax rate is 35%, and the required return on equity is 18%? A. 54.00%B. 63.64%C. 70.26%D. 77.78%
What will be the effect of using book value of debt in WACC decisions if interest rates have decreased substantially since a firm's long-term bonds were issued? A. The debt-to-value ratio will be overstated.B. The debt-to-value ratio will be understated.C. There will be no effect on WACC decisions.D. It cannot be determined without knowing interest rates.
An implicit cost of increasing the proportion of debt in a firm's capital structure is that: A. the firm's asset beta will increase.B. shareholders will demand a higher rate of return.C. the tax shield will not apply to the added debt.D. the equity-to-value ratio will decrease.
As debt is added to the capital structure, the: A. WACC will continually decline.B. WACC will continually increase.C. cost of debt can be expected to rise.D. WACC will be unaffected.
If a firm has three times as much equity as debt in its capital structure, then the firm has: A. 25.0% debt.B. 66.7% equity.C. 40.0% debt.D. 33.3% equity.
If a company's cost of capital is less than the required return on equity, then the firm: A. is financed with more than 50% debt.B. is perceived to be safe.C. has debt in its capital structure.D. cannot be using any debt.
With respect to the WACC: A. it is the proper discount rate for everything the company does.B. it is used to value all new projects.C. this benchmark discount rate is adjusted for the riskiness of the project.D. no adjustments need to be made when using it as the discount rate.
Should a project be accepted if it offers an annual after-tax cash flow of $1,250,000 indefinitely, costs $10 million, is riskier than the firm's average projects, and the firm uses a 12.5% WACC? A. Yes, since NPV is positive.B. Yes, since a zero NPV indicates marginal acceptability.C. No, since NPV is zero.D. No, since NPV is negative.
Calculate a firm's WACC given that the total value of the firm is $2,000,000, $600,000 of which is debt, the cost of debt and equity is 10% and 15%, respectively, and the firm pays no taxes. A. 9.0%B. 11.5%C. 13.5%D. 14.4%