Question

1. Which of the following statements is most correct? me money is readily available and the cost of retained earnings is usually a lot cheaper than the cost of debt financing higher . Firms often call in bonds that can be reissued at lower interest rates. Thus, bonds seling at a significant premium discount are most eligible to be called by the issuing company. c. Il a company's tax rate increases but the yield to maturity of its non-callable bonds remains the same, the company's marginal cost of debt capital used to calculate its weighted average cost of capital would fall. 1 TKI W (4 -tar d. None of the above each statement is incorrect. ILLI 15 e. Statements a and b are both correct. 2. Project A and Project B are mutually exclusive projects with equal risk. Project A has an internal rate of return of 12 percent, while Project B has an internal rate of return of 15 percent. The two projects have the same net present value when the cost of capital is 9 percent. (In other words, the "crossover rate" is 9 percent.) Which of the following statements is most correct? А a. If the cost of capital is 10 percent, each project will have a positive net present value. Il 11 b. If the cost of capital is 8 percent, Project B has a higher net present value than Project A. NPV . If the cost of capital is 13 percent, Project B has a higher net present value than Project A. Wc 9 7 d. Statements a and b are both correct. Statements a and care both correct. 15 3. 4. 101 0.6 02 Holding al other things constant, which of the folowing will increase a company's retained earnings break point? X An increase in its net income holding payout constant. non. Donal NL 50 60 50 b. An increase in its dividend payout holding net income constant. 50 c. An increase in the amount of equity in its capital structure paynd 407 407 507 407 d. An increase in its capital budget. ca 607 601 607 307 e. All of the statements above are correct. ARE 30 36 25 BP = 10:50 36 607 23-017 30.12 Which of the following statements is correct? 0.7 The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project. For example, it only debt is used to finance a project, only the cost of debt should be considered in determining the required rate of return for the project. b. The cost of debt used to calculate the weighted average cost of capital is based on an average of the cost of debt already issued by the firm and the cost of new debt. One problem with the CAPM approach in estimating the cost of equity capital is that if a firm's stockholders are, in fact, not well diversified, beta may be a poor measure of the frm's true investment risk. d. The bond yield-plus-risk premium approach is the most sophisticated and objective method of estimating a firm's cost of equity capital e. The cost of equity capital is generally casier to measure than the cost of debt, which varies daily with interest rates, or the cost of preferred stock since preferred stock is issued infrequently PLEASE TURN THE PAGE.

Answer 1

Answer1 marked correct

example: cost of equity is suppose 10%

Prio tax was 40% and assume yield is 5% so cost of debt is 5*(1-0.4)= 3

N now its 60% tax so now it would be 5*(1-0.6) =2

Wacc in case 1 is 13 and case 2 is 12%

Answer 2

• The NPV profile declines as the discount rate increases.
• Project A has a higher NPV at low discount rates, while Project B has a higher NPV at high discount rates. The NPV profiles of Project A and B join at the crossover rate, at which the projects' NPVs are equal.

Answer 3 what are retained earnings. Its profits of the company being saved and not given as dividend for future growth prospects. So how will retained earnings will increase when u earn more net income and doesnt doesn't increase the payments to shareholders.