1. a)You are walking into the office Monday morning and overhear a discussion. Lexi, Lauren and Madeleine are chatting. Madi states that the relative proportion of debt, equity and other securities that a firm has outstanding is together known as the Asset Ratio. Lauren said, no, what you described is the Current Ratio. Lexi said you are both wrong. What you described is the Capital Structure. What do you think? Is Lexi right? Is Lauren right? Is Madeleine right? Are none of them correct? Support your answer with examples, as appropriate. (5 points)

b) Lexi, Lauren and Madeleine continued their discussion. Most errors in capital budgeting occur when adjusting for the time value of money, said Lexi. No, said Lauren, most errors occur when one is interpreting results. Again, you are both wrong, said Madeleine. Most errors occur because of one errs in estimating the relevant cash flows. What do you think? Is Lexi right? Is Lauren right? Is Madeleine right? Are none of them correct? Support your answer with examples, as appropriate. (5 points)

c) Lexi, Lauren and Madeleine wrapped up their discussion with a view of how to calculate the weighted average cost of capital. Lexi says, One should always use accounting-based future information to value debt and equity to determine the weights for different sources of capital. Madi disagreed, you should always use the book-value (historical-based) information to value the elements in the sources of capital. Lauren said no, you should use market-based values of debt equity where you can. Who is correct? Support your answer with examples, as appropriate. (5 points)