11-1
1. When calculating the weighted average cost of capital, weights are based on:
2. Which of these completes this statement to make it true? The constant growth model is:
11-2
3. When firms use multiple sources of capital, they need to calculate the appropriate
discount rate for valuing their firm’s cash flows as:
4. Which of the following is a true statement?
5. Which of the following is a true statement regarding the appropriate tax rate to be used in
the WACC?
11-4
6. Which of these statements is true regarding calculating weights for WACC?
7. Which of the following statements is true?
8. Which of the following makes this a true statement? If the new project does significantly
increase the firm’s overall risk:
9. An average of which of the following will give a fairly accurate estimate of what a
project’s beta will be?
10. Which of the following makes this a true statement? Ideally, when searching for a beta
for a new line of business:
11. Which of these is an estimated WACC computed using some sort of proxy for the average
equity risk of the projects in a particular division?
12. Which of these statements is true regarding divisional WACC?
13. An objective approach to calculating divisional WACCs would be done by:
14. Which statement makes this a false statement? When a firm pays commissions to
underwriting firms that float the issuance of new stock:
15. Which of the following is a principle of capital budgeting which states that the
calculations of cash flows should remain independent of financing?
16. When we adjust the WACC to reflect flotation costs, this approach:
11–10
17. Which of these makes this a true statement? The WACC formula:
18. Which of these makes this a true statement? When determining the appropriate weights
used in calculating a WACC, it should reflect:
19. Any debt and preferred stock components of capital should:
20. Which of these are fees paid by firms to investment bankers for issuing new securities?
21. FlavR Co. stock has a beta of 2.0, the current risk-free rate is 2, and the expected return
on the market is 9 percent. What is FlavR Co’s cost of equity?
22. TJ Co. stock has a beta of 1.45, the current risk-free rate is 5.75, and the expected return
on the market is 14 percent. What is TJ Co‘s cost of equity?
23. CJ Co. stock has a beta of 0.9, the current risk-free rate is 5.6, and the expected return on
the market is 13 percent. What is CJ Co’s cost of equity?
24. WC Inc. has a $10 million (face value), 10-year bond issue selling for 99 percent of par
that pays an annual coupon of 9 percent. What would be WC’s before–tax component cost of
debt?
25. IVY has preferred stock selling for 98 percent of par that pays a 7 percent annual coupon.
What would be IVY’s component cost of preferred stock?
26. Fern has preferred stock selling for 95 percent of par that pays an 8 percent annual
coupon. What would be Fern’s component cost of preferred stock?
27. Rose has preferred stock selling for 99 percent of par that pays a 9 percent annual
coupon. What would be Rose’s component cost of preferred stock?
28. Sports Corp. has 10 million shares of common stock outstanding, 5 million shares of
preferred stock outstanding, and 1 million bonds. If the common shares are selling for $25 per
share, the preferred share are selling for $12.50 per share, and the bonds are selling for 97
percent of par, what would be the weight used for equity in the computation of Sports’ WACC?
29. JackITs has 5 million shares of common stock outstanding, 1 million shares of preferred
stock outstanding, and 20 thousand bonds. If the common shares are selling for $28 per share,
the preferred share are selling for $13.50 per share, and the bonds are selling for 98 percent of
par, what would be the weight used for equity in the computation of JackITs’ WACC?