Question 6 of 10

1.0 Points

Schalheim Sisters Inc. has always paid out all of its earnings as dividends, and

hence has no retained earnings. This same situation is expected to persist in

the future. The company uses the CAPM to calculate its cost of equity. Its

target capital structure consists of common stock, preferred stock, and debt.

Which of the following events would reduce the WACC?

A.The floatation costs associated with issuing new common stock increase

B.The companys beta increases

C.The market risk premium declines

D.Expected inflation increases

Question 7 of 10

1.0 Points

If a firm uses a single source of capital to fund a project, which of the following is correct?

A.The average cost of all previously raised capital should be used for evaluation

B.Only the cost of that source should be used to evaluate the firms WACC

C.Book values of the funding source should be used in calculating WACC

D.This project should still be evaluated using the firms WACC

Question 8 of 10

1.0 Points

Nobleford Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with 18 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually. Assume the par value of the bond is $1,000. If the tax rate is 35 percent, what is the aftertax cost of debt?

A.4.78%

B.1.88%

C.3.50%

D.5.39%

Question 9 of 10

1.0 Points

If there were no taxes, and if an all-equity firm financed new projects with more equity, then according to Modigliani and Miller, the market price per share of the stock would _____.

A.rise

B.be unaffected

C.decrease

Question 10 of 10

1.0 Points

Orville Popcorn Corp. uses no debt. The weighted average cost of capital is 8 percent. If the current market value of the equity is $18 million and the corporate tax rate is 35 percent. What is WACC?

A.8.87%

B.8%

C.8.12%

D.8.25%