FIN 390 QUESTIONS WITH VERIFIED ACCURATE
ANSWERS
The WACC is used in the capital budgeting project evaluation process either as the
_________ used in the calculation of a project's net present value, or the __________
against which a project's internal rate of return is compared. - Answers - Discount rate,
Hurdle Rate
There is a __________ relationship between a firm's risk level and its WACC - Answers
- Direct
Although the use of market value weights is theoretically superior to the use of book
value weights in the calculation of a firm's WACC, firms often use book value weights
due to their relative stability compared to the daily changes in market values. - Answers
- True
What does the WACC represent? - Answers - The minimum return that a firm should
earn on new investments exhibiting an average level of risk.
To calculate the after-tax cost of debt, multiply the before-tax cost of debt by - Answers -
(1-T)
Boeing Company can borrow funds at an interest rate of 7.3% for a period of eight
years. Its marginal federal-plus-state tax rate is 35%. BA's after-tax cost of debt is
_________ - Answers - 4.75%
At the present time, BA has a series of ten-year noncallable bonds with a face value of
$1,000 that are outstanding. These bonds have a current market price of $1,278.41 per
bond, and carry a coupon rate of 11% paid annually. The company incurs a federal-
plus-state tax rate of 35%. If BA wants to issue new debt, what would be a reasonable
estimate for its after-tax cost of debt? - Answers - 4.57%
In contrast, the Jackson Company is closely held and, therefore, cannot generate
reliable inputs with which to apply the CAPM method to estimate its cost of internal
equity (retained earnings). However, its management knows that its outstanding bonds
are currently yielding 8.91%, and the firm's analysts estimate that the risk premium of its
stocks over its bonds is currently 1.85%. As result, Jackson's cost of internal equity
(rss)—based on the own-bond-yield-plus-judgemental-risk-premium approach—is: -
Answers - 10.76%
True or False: Firms will raise all the common equity they can from retained earnings
before issuing new common stock, because capital from retained earnings is less
expensive than capital raised from issuing new common stock. - Answers - True
ANSWERS
The WACC is used in the capital budgeting project evaluation process either as the
_________ used in the calculation of a project's net present value, or the __________
against which a project's internal rate of return is compared. - Answers - Discount rate,
Hurdle Rate
There is a __________ relationship between a firm's risk level and its WACC - Answers
- Direct
Although the use of market value weights is theoretically superior to the use of book
value weights in the calculation of a firm's WACC, firms often use book value weights
due to their relative stability compared to the daily changes in market values. - Answers
- True
What does the WACC represent? - Answers - The minimum return that a firm should
earn on new investments exhibiting an average level of risk.
To calculate the after-tax cost of debt, multiply the before-tax cost of debt by - Answers -
(1-T)
Boeing Company can borrow funds at an interest rate of 7.3% for a period of eight
years. Its marginal federal-plus-state tax rate is 35%. BA's after-tax cost of debt is
_________ - Answers - 4.75%
At the present time, BA has a series of ten-year noncallable bonds with a face value of
$1,000 that are outstanding. These bonds have a current market price of $1,278.41 per
bond, and carry a coupon rate of 11% paid annually. The company incurs a federal-
plus-state tax rate of 35%. If BA wants to issue new debt, what would be a reasonable
estimate for its after-tax cost of debt? - Answers - 4.57%
In contrast, the Jackson Company is closely held and, therefore, cannot generate
reliable inputs with which to apply the CAPM method to estimate its cost of internal
equity (retained earnings). However, its management knows that its outstanding bonds
are currently yielding 8.91%, and the firm's analysts estimate that the risk premium of its
stocks over its bonds is currently 1.85%. As result, Jackson's cost of internal equity
(rss)—based on the own-bond-yield-plus-judgemental-risk-premium approach—is: -
Answers - 10.76%
True or False: Firms will raise all the common equity they can from retained earnings
before issuing new common stock, because capital from retained earnings is less
expensive than capital raised from issuing new common stock. - Answers - True
