FIN 320SOPHIA Principles of Finance Unit 3 Challenge 3. All Correct Answers

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Principles of Finance Unit 3 Challenge 3 1.1 What two components typically comprise a company's capital structure, and therefore its WACC?  a.) Debt and equity  b.) Equity and interest ... c.) Equity and assets  d.) Debt and interest 1.2 What is the weighted average cost of capital (WACC)?  a.) The present value of future cash flows to an organization.  b.) The average of the interest rates an organization pays on its preferred and common stock.  c.) The combination of interest rates being incurred from both debt and equity.  d.) The opportunity cost of foregone investments plus the risk of borrower default. 1.3 When making investment decisions, what measurement tells you the compensation needed to assume a given level of risk?  a.) Required rate of return  b.) Net present value  c.) Cost of debt  d.) Weighted average cost of capital 2.1 Using the following variables, calculate an organization's cost of preferred stock.  Dpref: $50  Ppref: $1000  g: 5%  a.) 10.0%  b.) 2.5%  c.) 7.5%  d.) 25.0% Using the following variables, calculate an organization's cost of debt on a $100,000 bond.  Rf: 2%  Credit-risk rate: 6%  t: 20%  a.) $6,400  b.) $7,840  c.) $1,600  d.) $8,000 2.3 Using the following variables, calculate an organization's cost of common equity.  Rf: 2%  βs: 1.2  (Rm – Rf): 6%  a.) 9.2%  b.) 7.9%  c.) 7.2%  d.) 8.7% 3.1 The discounted cash flow approach is useful for __________.  a.) finding where an asset falls on the security market line  b.) determining whether an asset being considered for a portfolio offers a reasonable expected return for the risk  c.) considering existing and future resources to make optimal investment decision  d.) measuring an asset’s sensitivity to systematic risk 3.2 The capital asset pricing model is useful for __________.  a.) estimating the value of an equity using the bond yield  b.) determining whether an asset's expected return will offset its susceptibility to market risk  c.) determining the net present value of an organization  d.) making decisions about which potential future projects to pursue 3.3 The bond yield plus risk premium (BYPRP) approach is useful for determining __________.  a.) the value of a company's private equity  b.) the value of a company's debt  c.) the overall value of a company  d.) the value of a company's publicly traded equity Company A Company B Market Value of Equity $200,000 $300,000 Market Value of Debt $150,000 $200,000 Cost of Equity 8% 5% Cost of Debt 3% 2% Tax Rate 30% 30% Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 6%?  a.) Only Company A.  b.) Both Company A and Company B.  c.) Only Company B.  d.) Neither Company A nor Company B. 4.2 Company A Company B Market Value of Equity $350,000 $150,000 Market Value of Debt $100,000 $150,000 Cost of Equity 9% 10% Cost of Debt 1.5% 2% Tax Rate 30% 25% Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 5.5%?  a.) Neither Company A nor Company B.  b.) Only Company A.  c.) Only Company B.  d.) Both Company A and Company B. Company A Company B Market Value of Equity $400,000 $200,000 Market Value of Debt $200,000 $500,000 Cost of Equity 10% 8% Cost of Debt 2% 2% Tax Rate 25% 35% Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 6%?  a.) Neither Company A nor Company B.  b.) Both Company A and Company B.  c.) Only Company B.  d.) Only Company A. [Show More]

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