Weighted average cost of capital (1)

The return shareholders require on their investment in a firm is called the: income return. cost of capital. cost of equity. capital gains yield. dividend yield. opportunity cost.

The cost of capital: remains constant for all projects undertaken by the same firm. implies a project will produce a positive net present value only when the rate of return on the project is less than the predetermined cost of capital. is primarily dependent upon the source of the funds used for a project. depends on how the funds are going to be utilized. will decrease as the risk level of a firm increases.

The capital structure weights used in computing the weighted average cost of capital: are restricted to the firm's debt and common stock. are computed using the book value of the long-term debt and the book value of equity. are based on the book values of total debt and total equity. are based on the market value of the firm's debt and equity securities. remain constant over time unless the firm issues new securities.

ABC Inc. uses both preferred and common stock as well as long-term debt to finance its operations. An increase in which one of the following will increase the capital structure weight of debt, all else equal?. number of shares of stock outstanding. book value of the outstanding shares of common stock. market price of the common stock. number of bonds outstanding. number of shares of preferred stock outstanding.

The weighted average cost of capital for a firm is the: required rate which every project's internal rate of return must exceed. rate of return a firm must earn on its existing assets to maintain the current value of its stock. maximum rate which the firm should require on any projects it undertakes. discount rate which the firm should apply to all of the projects it undertakes. coupon rate the firm should expect to pay on its next bond issue.

Which one of the following statements is correct concerning the weighted average cost of capital (WACC)?. The WACC will remain constant unless a firm retires some of its debt. The WACC may decrease as a firm's debt-equity ratio increases. A firm's WACC will decrease as the corporate tax rate decreases. When computing the WACC, the weight assigned to the preferred stock is based on thecoupon rate multiplied by the par value of the stock. The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book value per share.

J&H Co. is trying to estimate its weighted average cost of capital (WACC). Which of the following statements is most correct?. Since retained earnings are readily available, the cost of retained earnings is generally lower than the cost of debt. The after-tax cost of debt is generally more expensive than the before-tax cost of debt. The after-tax cost of debt is generally cheaper than the after-tax cost of equity.

X Company has no retained earnings. The company uses the CAPM to calculate the cost of equity capital. The company’s capital structure consists of common stock, preferred stock, and debt. Which of the following events will reduce the company’s WACC?. An increase in the flotation costs associated with issuing new common stock. An increase in the company’s beta. A reduction in the market risk premium. An increase in expected inflation.

For a typical firm, which of the following is correct? All rates are after taxes, and assume the firm operates at its target capital structure. Note. d is for debt; e is for equity: WACC > re > rd. re > WACC > rd. re > rd > WACC. rd > re > WACC.

The components of the cost of capital are: Common stock. Preferred stock. Debt. Working capital.