1. Which of the following statements is correct? A. The WACC measures the before
ID: 2627722 • Letter: 1
Question
1. Which of the following statements is correct?
A. The WACC measures the before-tax cost of capital.
B. An increase in the firm's marginal corporate tax rate will decrease the weighted average cost of capital.
C. Flotation costs can decrease the weighted average cost of capital.
D. None of these statements is correct.
2. Which of the following statements is correct?
A. A decrease in the firm's marginal corporate tax rate will decrease the weighted average cost of capital.
B. Flotation costs can decrease the weighted average cost of capital.
C. The cost of debt is based on the cost of all liabilities, including accounts payable and accruals.
D. None of these statements are correct.
3. Why do we use market-value weights instead of book-value weights?
A. Because firms often "window-dress" their financial statements.
B. Because we are interested in determining what the cost of financing the firm's assets would be given today's market situation and the component costs the firm currently faces, not what the historical prices would have been.
C. Because it is required in the Sarbanes-Oxley regulations.
D. None of these answers is correct.
A. A decrease in the firm's marginal corporate tax rate will decrease the weighted average cost of capital.
B. Flotation costs can decrease the weighted average cost of capital.
C. The cost of debt is based on the cost of all liabilities, including accounts payable and accruals.
D. None of these statements are correct.
3. Why do we use market-value weights instead of book-value weights?
A. Because firms often "window-dress" their financial statements.
B. Because we are interested in determining what the cost of financing the firm's assets would be given today's market situation and the component costs the firm currently faces, not what the historical prices would have been.
C. Because it is required in the Sarbanes-Oxley regulations.
D. None of these answers is correct.
Explanation / Answer
1. B. An increase in the firm's marginal corporate tax rate will decrease the weighted average cost of capital.
WACC uses after tax cost of debt ((1-t)*Debt rate)in its calculation. If tax rate increases ((1-t)*Debt rate) will decrease. Thus WACC will decrease if everything else remains the same.
2. D. None of these statements are correct.
Decrease in the firm's marginal corporate tax rate will increase the weighted average cost of capital as in part 1.
Floatation costs will increase the cost of equity and thus of capital
Account payable and accruals are not considered in cost of debt.
3. B. Because we are interested in determining what the cost of financing the firm's assets would be given today's market situation and the component costs the firm currently faces, not what the historical prices would have been.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.