Question
Please guys answer all the following questions. 1. A firm must earn the marginal cost of capital on new investments if it is to meet
Please guys answer all the following questions.
1. A firm must earn the marginal cost of capital on new investments if it is to meet the return requirements of all
investors.
True
False
2) A breakpoint will occur in the MCC schedule whenever the cost of a capital component rises.
True
False
3) The cost of retained earnings can be less than, equal to, or greater than the cost of new common stock, depending on taxes, flotation costs, investors attitudes, etc.
True
False
4) Santorum Co. has a capital structure of 50% debt, 20% preferred stock, and 30% common stock. Net income is forecast to be $1,000,000. The company pays out 40% of its earnings as dividends. How much new capital can the firm raise without having to issue new cotnmon shares or change its capital structure? (That is, what is the breakpoint associated with retained earnings?)
a. $180,000
b. $200,000
c. $600,000
d. $1,200,000 e. $2,000,000
5. A company has determined that its optimal capital structure consists of 40% debt and 60% equity. The before- tax cost of debt is 10%; the tax rate is 40%. The costs of retained earnings and new common shares are 8.00% and 9.41%, respectively. Net income is expected to be $40,000, and the dividend payout ratio is 50%. When the firms capital budget is $40,000, its weighted average cost of capital is:
a. 7.20%.
b. 8.05%.
c. 11.81%.
d. 13.69%.
e. 14.28%.
6) Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not relevant.
True
False
7. If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land.
True
False
8)Any cash flow that cannot be classified as incremental is relevant in a capital budgeting project analysis.
True
False
9) In cash flow estimation, the presence of externalities has no direct cash flow effects.
True
False
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