1) A firm that is financed with both debt and common equity should use which component costs of capital in the calculation of their WACC? - a.Debt alone / b. equity alone / c. debt and equity 2) Suppose that an incorporated dairy is considering opening up a roadside ice cream parlor. The dairy is currently all-equity financed but could borrow money at a pretax cost of 9% by mortgaging their existing operations. The owners could borrow money on a personal line of credit at 12%, and ice cream parlors normally have a cost of debt closer to 13%. If they plan on financing half of the ice cream parlor with debt, what before-tax cost of debt should the firm use when calculating the WACC to evaluate the new project? - a. 9% / b. 11% / c. 12% 3) For projects with risks higher than the firm's average, using a firm-wide WACC to evaluate them will usually result in: - a. Incorrect project acceptances / b. Incorrect projects rejections / c. all projects being incorrectly accepted or rejected 4) John's Johnboats, a small boat manufacturer, is considering starting a new division that will produce jet skis. While the small boat industry has a fairly low beta of 0.85, the jet-ski market has an average industry beta of 1.2. The firm's capital structure currently consists of one million outstanding shares of common stock, selling for $24 per share, and a five million dollar bond issue, selling at 107 percent of par. The expected market risk premium is 8 percent, and the current risk-free rate is 3.3%. The bonds pay a 10 percent annual coupon and mature in 20 years. If the new project will be funded with 50% percent equity and 50% debt and the firm faces a marginal tax rate of 34%, what should be the WACC for this new project? - a. 8.09% / b. 9.49% / c. 12.9% 5) Which of the following approaches to computing a divisional cost of capital will result in the fewest incorrectly accepted or incorrectly rejected projects? - a. An objective approach / b. calculating the WACC for each project based on its risk / c. calculating the WACC for each project based on the average risk of the firm