Question

If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to: I. reject some positive net present value projects, II. accept some negative net present value projects. III. favor low risk projects over high risk projects. IV. become riskier over time. O A. I and III only B. III and IV only C I and II only I, II, and IV only I, II, III, and IV OD ОЕ QUESTION 2 Teri's Tires has 7 percent preferred stock outstanding that sells for $68 a share. What is Teri's cost of preferred stock? 9.52 percent B.9.71 percent C.10.29 percent D. 10.78 percent E 11.76 percent ОА

Answer 1

Ans.

1.

Option D is correct i.e I , II and IV only.

III is not correct as it will favour high risk project over low risk project.

2.

Option C is correct i.e. 10.29 percent

Cost of Preferred Stock = Dividend / Price * 100 = $ 7 / $ 68 *100 = 10.29%

Dividend = 100 * 7% = $7

It is assumed that FV is $100