Corp Fin Q W1-4

Tina has been promoted and is now in charge of all fixed asset purchases. In other words, Tina is in charge of:

• capital structure management

• capital budgeting

• working capital management

• risk management

Which one of the following is a working capital decision?

• How should the firm raise additional capital to fund its expansion?

• What is the cost of debt financing?

• How much cash should the firm keep in reserve?

• Which type of debt is best suited to finance our inventory?

Which is NOT a capital component when calculating WACC for

use in capital budgeting?

• Long-term debt.

• Accounts payable.

• Retained earnings.

• Preferred stock.

Typically, which sequence is CORRECT?

All rates are after taxes at its targeted capital structure.

• rs > re > rd > WACC.

• WACC > rd > rs > re.

• re > rs > WACC > rd.

• rd > re > rs > WACC.

Dividend is $0.80/share next year. Market price is $22.40/share, growth

rate is 5%. What is firm's cost of equity?

• 7.58 percent

• 7.91 percent

• 8.24 percent

• 8.57 percent

You were hired as a financialist to Anggun Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 13.00%. The firm will not be issuing any new stock. What is its WACC?

• 9.38%

• 8.81%

• 7.03%

• 11.63%

Based on the information below, what is the firm's optimal

capital structure?

• Debt = 40%; Equity = 60%; EPS = $2.95; Stock p = $26.50.

• Debt = 50%; Equity = 50%; EPS = $3.05; Stock p = $28.90.

• Debt = 60%; Equity = 40%; EPS = $3.18; Stock p = $31.20.

• Debt = 80%; Equity = 20%; EPS = $3.42; Stock p = $30.40

An increase in the debt ratio will generally have no effect on which of these items?

• Business risk.

• Financial risk

• Market risk

• Firm's beta

Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in favor of the project with the higher IRR.

• True

• False

The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with the present value of the cash inflows.

• True

• False