Y8

Which of the following statements is most correct?

a. The weighted average cost of capital for a given capital budget level is a weighted average of the

marginal cost of each relevant capital component that makes up the firm's target capital structure.

b. An increase in the risk-free rate will have no impact on the marginal costs of both debt and equity

capital financing.

c. The weighted average cost of capital is calculated on a before-tax basis.

d. Statements a and c are correct.

e. All of the statements above are correct.

20. Company A acquires Company B for $1.0 million. Company K has assets with a FMV of $0.8

million and liabilities with FVM of $600,000. Assume there are no identifiable intangible assets. If

the acquiring company uses the purchase method to account for the transaction, it will recognize

goodwill of:

A). $200,000

B). $600,000

C). $800,000

D). $500,000

E). $400,000

Hints: Goodwill = Purchase Price - FVM of Target Company's net assets