2. Which of the following statements are correct (there can be several correct answers)? a) The...
2. Which of the following statements are correct (there can be several correct answers)? a) The WACC is based on the fact that cost of equity and the cost of debt can be different b) The notion of “tax shield” is extremely important when calculating the cost of debt c) The capital structure of a company is taken into account when calculating the WACC d) Everything being equal, a company with a more volatile stock price has a lower WACC e) It would be probably irrelevant to use the WACC for a company with no debt
Homework Answers
Option a ,b and c is correct option .
Option d is wrong because higher the volatility more is the stock
price.Hence higher is the WACC.
Option e is wrong because WACC also uses preferred stock as part of
WACC.
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2. Which of the following statements are correct (there can be several correct answers)? a) The...
1. Which of the following statements are correct (there can be several correct answers)? a) A...
1. Which of the following statements are correct (there can be several correct answers)? a) A project whose expected return is greater than the company's WACC is worth pursuing b) WACC represents the required return by the company's shareholders c) When a project shows a negative NPV, this means its expected return is lower than the company's WACC d) When making an investment decision, calculating IRR is not relevant 2. Which of the following statements are correct (there can be...
Which of the following statements about capital structure and the WACC is CORRECT? A. Since debt...
Which of the following statements about capital structure and the WACC is CORRECT? A. Since debt financing is cheaper than equity financing, raising a company’s debt ratio will always reduce its WACC. B. Increasing a company’s debt ratio will typically reduce the marginal cost of both debt and equity financing. However, this action still may raise the company’s WACC. C. Since debt financing raises the firm's financial risk, increasing a company’s debt ratio will always increase its WACC. D. Increasing...
Which of the following statements is CORRECT? a. When calculating the cost of preferred stock, a...
Which of the following statements is CORRECT? a. When calculating the cost of preferred stock, a company does not need to adjust for taxes, because preferred stock dividends are not deductible by the paying corporation b. Since the money is readily available, the after-tax cost of retained earnings is usually much lower than the after-tax cost of debt c. All else equal, an increase in a company’s stock price will increase its marginal cost of retained earnings, rs d. All...
Question 13 (1 point) Which of the following statements is correct? A) When calculating the cost...
Question 13 (1 point) Which of the following statements is correct? A) When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation. B) When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible for the corporation. OC) If a company's beta increases, this will increase the cost of equity, but never its WACC. D) Because of tax effects,...
Which of the following statements is CORRECT? Of the three methods for estimating the cost of...
Which of the following statements is CORRECT? Of the three methods for estimating the cost of equity from retained earnings identified in the textbook, only the DCF method is widely used in practice. The before-tax cost of debt rather than the after-tax cost should be used as the component cost of debt for purposes of developing a company's WACC. The lower the firm's tax rate, the higher will be its after-tax cost of debt and also its WACC, other things...
Which of the following statements are correct in relation to Modigliani and Miller’s propositions in a...
Which of the following statements are correct in relation to Modigliani and Miller’s propositions in a frictionless perfect capital market? A. The required return on assets is equal to the weighted average cost of capital. B. The risk of a firm’s equity is determined by the debt-equity (D/E) ratio. C. A firm’s cost of equity is a linear function of the debt-equity (D/E) ratio. D. The cost of equity declines when the amount of leverage used by a firm rises....
Which of the following statements is CORRECT? Since debt financing is cheaper than equity financing, raising...
Which of the following statements is CORRECT? Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its WACC Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing; however, this action still may raise the company's WACC Increasing a company's debt ratio will typically increase the marginal cost of both debt and equity financing; however, this action still may lower the company's WACC Since a firm's...
If taxes rate decreases (for example, from 40% to 20%). Given the following four statements: I....
If taxes rate decreases (for example, from 40% to 20%). Given the following four statements: I. The benefit of tax shield created by debt decreases. II. The cost of debt (financial distress and bankruptcy cost) increases. III. When taxes rate is 20%, the cost of equity will increase with leverage but at a slower rate compared to when tax rate is 40%. IV. For the same firm, the optimal capital structure will have a lower leverage ratio when tax rate...
Which of the following statements about capital structure are correct?
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1. Which of the following statements is most correct? me money is readily available and the...
1. Which of the following statements is most correct? me money is readily available and the cost of retained earnings is usually a lot cheaper than the cost of debt financing higher . Firms often call in bonds that can be reissued at lower interest rates. Thus, bonds seling at a significant premium discount are most eligible to be called by the issuing company. c. Il a company's tax rate increases but the yield to maturity of its non-callable bonds...
Question 13 (1 point) Which of the following statements is correct? A) When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation. B) When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible for the corporation. OC) If a company's beta increases, this will increase the cost of equity, but never its WACC. D) Because of tax effects,...
Which of the following statements is CORRECT? Of the three methods for estimating the cost of equity from retained earnings identified in the textbook, only the DCF method is widely used in practice. The before-tax cost of debt rather than the after-tax cost should be used as the component cost of debt for purposes of developing a company's WACC. The lower the firm's tax rate, the higher will be its after-tax cost of debt and also its WACC, other things...
1. Which of the following statements is most correct? me money is readily available and the cost of retained earnings is usually a lot cheaper than the cost of debt financing higher . Firms often call in bonds that can be reissued at lower interest rates. Thus, bonds seling at a significant premium discount are most eligible to be called by the issuing company. c. Il a company's tax rate increases but the yield to maturity of its non-callable bonds...
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