FFM_Ch.10 (WACC)

The Weighted Average Cost of Capital (WACC) represents:

• The cost of debt only

• The cost of equity only

• The average rate a firm must earn on its investments to maintain value

• The firm’s operating cost

• The firm’s dividend growth rate

Which of the following costs is adjusted for taxes when calculating WACC?

• Cost of equity

• Cost of debt

• Cost of preferred stock

• Cost of retained earnings

• Flotation cost

The after-tax cost of debt is calculated as:

• Kd (1+T)

• Kd (1-T)

• Kd/(1-T)

• Ks+T

• Kd-T

The component cost of equity can be estimated using all of the following EXCEPT:

• CAPM approach

• Dividend discount model

• Bond yield + risk premium

• Historical cost method

• None of the above

In the WACC formula, weights are based on:

• Book values

• Market values

• Historical costs

• Depreciated costs

• Replacement costs

The CAPM formula for cost of equity is:

• Ke=Rf+(Rm-Rf)/β

• Ke=Rf+β(Rm-Rf)

• Ke=(Rm-Rf)+β

• Ke=Rf+Rm/β

• Ke=Rm-Rf+β

Which of the following is NOT a component of capital structure?

• Long-term debt

• Common equity

• Preferred stock

• Accounts payable

• Retained earnings

Flotation costs:

• Increase the cost of new equity

• Decrease the cost of new equity

• Do not affect WACC

• Apply only to retained earnings

• Are tax deductible

If a firm’s WACC increases, the firm’s NPV for a project will:

• Increase

• Decrease

• Stay the same

• Become zero

• Be unaffected by WACC

The cost of preferred stock is computed as:

• Dp/Pp

• Dp/(Pp-F)

• Dp(1-T)/Pp

• (Dp+g)/Pp

• Dp/(Pp+g)