SDSU BA323
SDSU BA323 Brincks Final Exam Study
Guide Questions and Answers 2025
Why do we care about the weighted average cost of capital (WACC)? -Correct Answer
✔WACC is necessary for making corporate investment decisions, such as building a new
factory. WACC gauges the risk of a project (Higher WACC means more risk associated.)
Two sides of an investment decision:
- How much money will this project make?
- How much does it cost for the firm to get the funds for this investment?
What are the 3 main sources of capital for the firm? -Correct Answer ✔Debt, preferred
stock, and common equity are 3 main sources of capital
What are the 2 components of common equity? -Correct Answer ✔Retained earnings
and new common stock are 2 components of common equity.
What are 2 components of debt? -Correct Answer ✔Short term notes payable and long-
term debt are 2 components of debt.
Do we care about after-tax or pre-tax analysis? Why? -Correct Answer ✔After-tax capital
cost since interest is tax deductible
What are the 3 methods of determining a company's target weights? -Correct Answer
✔Accounting numbers (book value), Market value and optimal capital structure
determination are all methods used to determine target weights.
SDSU BA323
, SDSU BA323
What are the 3 ways to determine the cost of common equity? -Correct Answer
✔CAPM, DCF, and Bond-yield + risk premium
Why is there a cost for retained earnings? -Correct Answer ✔If earnings 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.
The firm's capital structure and dividend policy.
The firm's investment policy. Firms with riskier projects generally have a higher WACC.
Should companies use the composite WACC as the hurdle rate for each project? Why
not? -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. Issuing new common stocks may send a negative signal to the capital markets,
which may depress the stock price.
How do changes in stock or debt change capital structure? -Correct Answer ✔Stock is
expensive and debt is cheap. Since stock is more risky than debt, it cost more to issue
stock than debt.
If you increase the percentage of stock, __________. If you decrease the percentage of
debt, ___________. -Correct Answer ✔WACC goes up
SDSU BA323
SDSU BA323 Brincks Final Exam Study
Guide Questions and Answers 2025
Why do we care about the weighted average cost of capital (WACC)? -Correct Answer
✔WACC is necessary for making corporate investment decisions, such as building a new
factory. WACC gauges the risk of a project (Higher WACC means more risk associated.)
Two sides of an investment decision:
- How much money will this project make?
- How much does it cost for the firm to get the funds for this investment?
What are the 3 main sources of capital for the firm? -Correct Answer ✔Debt, preferred
stock, and common equity are 3 main sources of capital
What are the 2 components of common equity? -Correct Answer ✔Retained earnings
and new common stock are 2 components of common equity.
What are 2 components of debt? -Correct Answer ✔Short term notes payable and long-
term debt are 2 components of debt.
Do we care about after-tax or pre-tax analysis? Why? -Correct Answer ✔After-tax capital
cost since interest is tax deductible
What are the 3 methods of determining a company's target weights? -Correct Answer
✔Accounting numbers (book value), Market value and optimal capital structure
determination are all methods used to determine target weights.
SDSU BA323
, SDSU BA323
What are the 3 ways to determine the cost of common equity? -Correct Answer
✔CAPM, DCF, and Bond-yield + risk premium
Why is there a cost for retained earnings? -Correct Answer ✔If earnings 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.
The firm's capital structure and dividend policy.
The firm's investment policy. Firms with riskier projects generally have a higher WACC.
Should companies use the composite WACC as the hurdle rate for each project? Why
not? -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. Issuing new common stocks may send a negative signal to the capital markets,
which may depress the stock price.
How do changes in stock or debt change capital structure? -Correct Answer ✔Stock is
expensive and debt is cheap. Since stock is more risky than debt, it cost more to issue
stock than debt.
If you increase the percentage of stock, __________. If you decrease the percentage of
debt, ___________. -Correct Answer ✔WACC goes up
SDSU BA323
