BA 323 BRINCKS EXAM 1 | ALL QUESTIONS AND
CORRECT ANSWERS | GRADED A+ | NEWEST
VERSION | VERIFIED ANSWERS2025
Why do we care about the weighted average cost of capital? - CORRECT ANSWER -
WACC is necessary for making investment decisions
What are the three main sources of capital for the firm? - CORRECT ANSWER - Debt,
preferred stock, and common equity
What are the two components of debt? - CORRECT ANSWER - short-term notes
payable and long-term debt
What are the two components of common equity? - CORRECT ANSWER - retained
earnings and new common stock
Do we care about after-tax or pre-tax analysis? - CORRECT ANSWER - After tax
capital cost, interest is tax deductible
What are the three ways/methods for determining a company's target weights? -
CORRECT ANSWER - Book value
Market value
Optimal capital structure
What are the three ways to determine the cost of common equity? - CORRECT
ANSWER - CAPM
DCF
Bond-yield plus risk premium
Why is there a cost for retained earnings? - CORRECT ANSWER - If earning are
retained, there is an opportunity cost (the return that stockholders could earn on
alternative investments of equal risk)
What factors influence a company's composite WACC? - CORRECT ANSWER - Market
conditions: interest rates, state of the economy
Firm's capital structure, firm's dividend policy, firm's investment policy
Risk: riskier projects will increase a firm's WACC
, Should the company use the composite WACC as the hurdle rate for each of its
projects? - CORRECT ANSWER - No, because projects typically have different
riskiness
What are flotation costs and why do they make retained earnings cheaper than issuing
new common stock? - CORRECT ANSWER - Transaction costs associated with issuing
new securities, make new equity cost more than existing equity
What is capital budgeting? - CORRECT ANSWER - Analysis of potential additions to
fixed assets and rates of return
What is a company's strategic business plan? - CORRECT ANSWER - A long plan that
outlines in broad terms the firm's basic strategy for the next 5-10 years
What are the five criteria used to accept or reject a project? - CORRECT ANSWER -
Net present value
Internal rate of return
modified internal rate of return
regular payback
discounted payback
What is the difference between independent and mutually exclusive projects? -
CORRECT ANSWER - With independent projects, the cash flows of one project are
unaffected by the acceptance of the other
With mutually exclusive projects, the cash flows of one can be adversely impacted by
the acceptance of other projects
Which type of project is harder to calculate? - CORRECT ANSWER - Mutually exclusive
Explain the difference between normal and nonnormal cash flows. - CORRECT
ANSWER - Normal cash flow has an initial negative cash outflow followed by a series of
positive cash inflows
Nonnormal cash flows have a 2 or more changes of signs
Which cash flow is the most common? - CORRECT ANSWER - Normal cash flows
When to accept project using NPV - CORRECT ANSWER - NPV>0 if independent
Project with highest NPV if mutually exclusive
CORRECT ANSWERS | GRADED A+ | NEWEST
VERSION | VERIFIED ANSWERS2025
Why do we care about the weighted average cost of capital? - CORRECT ANSWER -
WACC is necessary for making investment decisions
What are the three main sources of capital for the firm? - CORRECT ANSWER - Debt,
preferred stock, and common equity
What are the two components of debt? - CORRECT ANSWER - short-term notes
payable and long-term debt
What are the two components of common equity? - CORRECT ANSWER - retained
earnings and new common stock
Do we care about after-tax or pre-tax analysis? - CORRECT ANSWER - After tax
capital cost, interest is tax deductible
What are the three ways/methods for determining a company's target weights? -
CORRECT ANSWER - Book value
Market value
Optimal capital structure
What are the three ways to determine the cost of common equity? - CORRECT
ANSWER - CAPM
DCF
Bond-yield plus risk premium
Why is there a cost for retained earnings? - CORRECT ANSWER - If earning are
retained, there is an opportunity cost (the return that stockholders could earn on
alternative investments of equal risk)
What factors influence a company's composite WACC? - CORRECT ANSWER - Market
conditions: interest rates, state of the economy
Firm's capital structure, firm's dividend policy, firm's investment policy
Risk: riskier projects will increase a firm's WACC
, Should the company use the composite WACC as the hurdle rate for each of its
projects? - CORRECT ANSWER - No, because projects typically have different
riskiness
What are flotation costs and why do they make retained earnings cheaper than issuing
new common stock? - CORRECT ANSWER - Transaction costs associated with issuing
new securities, make new equity cost more than existing equity
What is capital budgeting? - CORRECT ANSWER - Analysis of potential additions to
fixed assets and rates of return
What is a company's strategic business plan? - CORRECT ANSWER - A long plan that
outlines in broad terms the firm's basic strategy for the next 5-10 years
What are the five criteria used to accept or reject a project? - CORRECT ANSWER -
Net present value
Internal rate of return
modified internal rate of return
regular payback
discounted payback
What is the difference between independent and mutually exclusive projects? -
CORRECT ANSWER - With independent projects, the cash flows of one project are
unaffected by the acceptance of the other
With mutually exclusive projects, the cash flows of one can be adversely impacted by
the acceptance of other projects
Which type of project is harder to calculate? - CORRECT ANSWER - Mutually exclusive
Explain the difference between normal and nonnormal cash flows. - CORRECT
ANSWER - Normal cash flow has an initial negative cash outflow followed by a series of
positive cash inflows
Nonnormal cash flows have a 2 or more changes of signs
Which cash flow is the most common? - CORRECT ANSWER - Normal cash flows
When to accept project using NPV - CORRECT ANSWER - NPV>0 if independent
Project with highest NPV if mutually exclusive
