1. The weighted average cost of capital for a firm is...

a. The discount the firm should apply to all capital budgeting projects the firm undertakes.

b. The rate of return shareholders should expect to earn on their stocks.

c. The rate of return a firm must earn in its existing assets to maintain the current value of its stock.

d. The coupon rate the firm pays on its bond issues.

2. The primary determinant of a firm's cost of capital is...

a. The firm's use of funds to purchase assets.

b. The firm's cost of equity

c. The firm's cost of debt.

d. The firm's debt-to-equity ratio.

3. Big Bang Solutions had two separate divisions. Division X is the largest division with 70 percent of the firm's overall sales and is high risk. Division Z is smaller and less risky. Managers should...

a. Allocate the firm's funds to the project with the highest NPVs based on the firm's WACC regardless of divison.

b. Fund the highest NPV projects from each division based on an allocation of 70% of funds to Divison X and 30% of funds to Division Z.

c. Fund all of Division Z's projects first since they tend to be less risky then allocate the remaining funds to the Division X projects that have the highest NPVs

d. Assign appropriate, but differing, discount rates to each project and then select the projects with the highest NPVs

e. Allocate more funds to Division X since it is the largest division.

4. T/F: If a firm uses its WACC as the discount rate for all projects undertaken by the firm, the firm will lower its risk and the WACC will decrease.