A) 28.36%
B) 29.54%
C) 30.77%
D) 32.00%
E) 33.28%
G) B) and E)
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B) False
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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) Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM.
C) If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough reinvested earnings to take care of its equity financing and hence must issue new stock.
D) Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC.
E) When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.
G) C) and E)
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A) If a firm's managers want to maximize the value of their firm's stock, they should, in theory, concentrate on project risk as measured by the standard deviation of the project's expected future cash flows.
B) If a firm evaluates all projects using the same cost of capital, and the CAPM is used to help determine that cost, then its risk as measured by beta will probably decline over time.
C) Projects with above-average risk typically have higher than average expected returns.Therefore, to maximize a firm's intrinsic value, its managers should favor high-beta projects over those with lower betas.
D) Project A has a standard deviation of expected returns of 20%, while Project B's standard deviation is only 10%.A's returns are negatively correlated with both the firm's other assets and the returns on most stocks in the economy, while B's returns are positively correlated.Therefore, Project A is less risky to a firm and should be evaluated with a lower cost of capital.
E) If a firm has a beta that is less than 1.0, say 0.9, this would suggest that the expected returns on its assets are negatively correlated with the returns on most other firms' assets.
G) C) and E)
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A) 1.13%
B) 1.50%
C) 1.88%
D) 2.34%
E) 2.58%
G) A) and B)
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B) False
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B) False
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A) J and F should have identical WACCs because their risks as measured by the standard deviation of returns are identical.
B) If J and F merge, then the merged firm MW should have a WACC that is a simple average of J's and F's WACCs.
C) Without additional information, it is impossible to predict what the merged firm's WACC would be if J and F merged.
D) Since J and F move counter cyclically to one another, if they merged, the merged firm's WACC would be less than the simple average of the two firms' WACCs.
E) J should have the lower WACC because it is like most other companies, and investors like that fact.
G) B) and C)
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A) 9.42%
B) 9.91%
C) 10.44%
D) 10.96%
E) 11.51%
G) A) and E)
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A) Project C, which is of above-average risk and has a return of 11%.
B) Project A, which is of average risk and has a return of 9%.
C) None of the projects should be accepted.
D) All of the projects should be accepted.
E) Project B, which is of below-average risk and has a return of 8.5%.
G) C) and D)
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A) 0.09%
B) 0.19%
C) 0.37%
D) 0.56%
E) 0.84%
G) A) and D)
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A) 1.55%
B) 1.72%
C) 1.91%
D) 2.13%
E) 2.36%
G) A) and C)
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