12.

A company has determined that its optimal capital structure consists of 40 percent debt and 60 percent equity. The company's CAPM beta is 1.5, the risk-free rate is 4%, and the expected return on the market (E[R_M] is 6%. The company can issue bonds at a yield to maturity of 12%, and it faces a 21% tax rate. What is the company's target WACC?

7.99%

11.59%

8.49%

7.00%

9.48%

13.

Which of the following statements about WACC is true?

Firm value is maximized when WACC is minimized.

The flotation costs of preferred stock are low and can be ignored when optimizing WACC.

WACC is the appropriate discount rate for all project analysis, regardless of operating division or risk profile.

Since the interest payments on debt are tax deductable, increasing debt results in lower WACC.

Prior to going public through an initial public offering (IPO), firms do not have publically traded equity, and this component must be ignored when calculating WACC.

14.

Which of the following statements is correct?

Two stocks with the same standard deviation will have the same beta.

If a stock's beta doubles, then its required rate of return will also double.

A stock with a negative beta must have a negative required rate of return.

The slope of the security market line is measured by beta.

Over time, it is possible for a stock's beta to increase even as the stock's volatility declines.