FIN 101 Mid Term-Financial Management Exam

Q1. For a typical corporation, which of the following capital structures will result in the lowest weighted average cost of capital? a. 40% debt, 20% preferred stock, 40% common equity b. 50% debt, 10% preferred stock, 40% common equity c. 60% debt, 10% preferred stock, 30% common equity d. 60% debt, 15% preferred stock, 25% common equity Q2. Why should firms that own and operate multiple businesses that have different risk characteristics use business-specific, or divisional costs of capital? a. Not all divisions have equal risk and the firm might accept projects whose returns are higher than are deemed appropriate. b. Not all business divisions have equal risk and the firm will likely become less risky in the future. c. Not all lines of business have equal risk and it is likely that the firm will accept projects