Business Finance - 17742 Words

CHAPTER 9 THE COST OF CAPITAL (Difficulty: E = Easy, M = Medium, and T = Tough) Multiple Choice: Conceptual Easy: Capital components Answer: c Diff: E [i]. Which of the following is not considered a capital component for the purpose of calculating the weighted average cost of capital (WACC) as it applies to capital budgeting? a. Long-term debt. b. Common stock. c. Accounts payable and accruals. d. Preferred stock. Capital components Answer: d Diff: E [ii]. For a typical firm with a given capital structure, which of the following is correct? (Note: All rates are after taxes.) a. kd ke ks WACC. b. ks ke kd WACC. c. WACC ke ks kd. d. ke †¦show more content†¦Statements a and b are correct. e. Statements a and c are correct. Factors influencing WACC Answer: a Diff: E [ix]. Wyden Brothers 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? a. A reduction in the market risk premium. b. An increase in the flotation costs associated with issuing new common stock. c. An increase in the company’s beta. d. An increase in expected inflation. e. An increase in the flotation costs associated with issuing preferred stock. WACC and capital components Answer: c Diff: E [x]. Which of the following statements is most correct? a. The WACC is a measure of the before-tax cost of capital. b. Typically the after-tax cost of debt financing exceeds the after-tax cost of equity financing. c. The WACC measures the marginal after-tax cost of capital. d. Statements a and b are correct. e. Statements b and c are correct. WACC and capital components Answer: a Diff: E [xi]. A company has a capital structure that consists of 50 percent debt and 50 percent equity. Which of the following statements is most correct? a. The cost of equity financing is greater than or equal to the cost of debt financing. b. The WACC exceeds the cost of equity financing.Show MoreRelatedBusiness Finance1291 Words   |  6 PagesUBFF2013 BUSINESS FINANCE Question: 1. (a) Frodo Baggins has RM1,500 to invest. His investment counselor suggests an investment that pays no stated interest but will return RM2,000 at the end of 3 years. (i) (ii) What annual rate of return will Frodo earn with this investment? Frodo is considering another investment, of equal risk, that earns an annual return of 8%. Which investment should he make and why? (b) Samwise Gamgee was seriously injured in an industrial accident. He suedRead MoreFinance in Business542 Words   |  2 PagesThe term finance originated in France. The English society adapted the word in the eighteenth century to mean administration of money. It has become a permanent fixture of English dictionary since then. 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AreRead MoreBUSINESS FINANCE Business finance is the wide range of activities around the management of money1400 Words   |  6 Pages BUSINESS FINANCE Business finance is the wide range of activities around the management of money and valuable assets or rather is the business activity with capital funds in meeting financials needs. INTRODUCTION Business aims at building value for its owners, customers and other stakeholders. The value of the output should exceed the costs of input in resources. Resources which make information to flows areRead MoreThe Importance of Corporate Finance in a Business Plan2232 Words   |  9 PagesThe research is done by the request of the potential investors in the 5 Aces business club on the basis of the business plan provided. Problem faced: The importance of corporate finance in a business plan. The author of the paper is a 3rd year bachelor student in corporate finance Olga Jegorova. The aim of the paper is to elaborate the recommendations on the corporate finance importance when faced with a business plan analysis based on the theory and particular cases. To achieve the aimRead MoreBusiness Studies Essay Relating to Finance2046 Words   |  9 PagesManagement is a critical aspect of any business in order to achieve a sustainable and efficient cash flow. It is essential in maintaining the link between a business’s future financial goals (profit maximization) and the resources that it has in order to achieve its objectives. Businesses demand certain common goals that increase a bussinesss all around achievement, Some of which involve; growth amongst assests, An increase in efficiency in all areas of the business whether it be management or not. AndRead MoreRelationship Between Business And Finance And Accounting779 Words   |  4 PagesIn the world-at-large, Finance and Accounting are often erroneously linked together. As if to say, they are one-and-the-same – a sort of a misnomer, you can say. In conversations concerning both disciplines, the colloquial marriage of both business sectors is as common place as light is to the day. It is true, that to successfully manage a business, both principles must be applied in equilibrium to replicate success in any organized venture; however, their differences are highlighted in training