BA 323 EXAM 3 2026 BUSINESS DECISION
MAKING REVIEW QUESTIONS ANSWERS
VERIFIED GUIDE
◉ What are the 3 main sources of capital for the firm?
Answer: - Debt
- Preferred stock
- Common equity
◉ What are the 2 components of common equity?
Answer: - Retained earnings
- New common stock
◉ What are the 2 components of debt?
Answer: - Notes payable (S-T)
- L-T debt
◉ Know how to calculate WACC.
(Including finding the cost of debt, preferred stock, and equity, given
target weights)
Answer:
,◉ Do we care about after-tax or pre-tax analysis? Why?
Answer: - After-tax capital cost
- Interest is tax deductible
◉ What are the 3 ways/methods of determining a company's target
weights?
Answer: - Accounting numbers (book value)
- Market value
- Optimal capital structure determination
◉ What are the 3 ways to determine the cost of common equity?
Know how to calculate them.
Answer: - CAPM (Capital asset pricing model)
- DCF (discounted cash flow)
- Bond-yield plus risk premium
◉ Why is there a cost for retained earnings?
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? Know how
each impacts the company.
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 project? Why not?
Answer: No
projects typically have different riskiness.
◉ What are flotation costs and why do they make retained earnings
cheaper than issuing new common stock?
Answer: Transaction costs
associated with issuing new securities
◉ What is capital budgeting?
Answer: Analysis of potential additions to fixed assets and rates of
return
◉ What is a company's strategic business plan?
MAKING REVIEW QUESTIONS ANSWERS
VERIFIED GUIDE
◉ What are the 3 main sources of capital for the firm?
Answer: - Debt
- Preferred stock
- Common equity
◉ What are the 2 components of common equity?
Answer: - Retained earnings
- New common stock
◉ What are the 2 components of debt?
Answer: - Notes payable (S-T)
- L-T debt
◉ Know how to calculate WACC.
(Including finding the cost of debt, preferred stock, and equity, given
target weights)
Answer:
,◉ Do we care about after-tax or pre-tax analysis? Why?
Answer: - After-tax capital cost
- Interest is tax deductible
◉ What are the 3 ways/methods of determining a company's target
weights?
Answer: - Accounting numbers (book value)
- Market value
- Optimal capital structure determination
◉ What are the 3 ways to determine the cost of common equity?
Know how to calculate them.
Answer: - CAPM (Capital asset pricing model)
- DCF (discounted cash flow)
- Bond-yield plus risk premium
◉ Why is there a cost for retained earnings?
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? Know how
each impacts the company.
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 project? Why not?
Answer: No
projects typically have different riskiness.
◉ What are flotation costs and why do they make retained earnings
cheaper than issuing new common stock?
Answer: Transaction costs
associated with issuing new securities
◉ What is capital budgeting?
Answer: Analysis of potential additions to fixed assets and rates of
return
◉ What is a company's strategic business plan?
