Question 9

Argo's target capital structure is 40% debt, 10% preferred, and 50% common equity. The interest rate is 7.00%, the cost of preferred is 8.00%, the cost of common equity is 14.2%, and the tax rate is 35%. What is Argo's WACC?

8.76%

9.26%

9.72%

10.13%

11.12%

Question 10

To help finance a major expansion, Sorban Inc. sold a bond several years ago that now has 20 years to maturity. This bond has a 7.5% stated rate, paid semiannually, and sells at 98.5. If the firm's tax rate is 38%, what is the component cost of debt for use in the WACC calculation?

4.33%

4.50%

4.74%

5.08%

5.33%

Question 11

Which of the following statements is CORRECT?

One defect of the IRR method is that it does not take account of cash flows over a project's full life.

One defect of the IRR method is that it does not allow for the comparison of multiple projects.

One defect of the IRR method is that larger projects automatically return a higher IRR than smaller projects.

One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future.

One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.

Question 12

Which of the following statements is CORRECT for a firm with normal cash flows?

A project's IRR increases as the WACC declines.

A project's NPV decreases as the WACC declines.

A project's MIRR is unaffected by changes in the WACC.

A project's regular payback increases as the WACC declines.

A project's discounted payback decreases as the WACC declines.