Question 21 Which of the following is NOT a capital component when calculating t

Question

Question 21

Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?
Answer Long-term debt.
Accounts payable.
Retained earnings.
Common stock.
Preferred stock.
.2 points
Question 22

Which of the following statements is CORRECT? Assume that the firm is a publicly-owned corporation and is seeking to maximize shareholder wealth.
Answer If a firm has a beta that is less than 1.0, say 0.9, this would suggest that the expected returns on its assets are negatively
correlated with the returns on most other firms

Explanation / Answer

Question 21 Accounts payable. Question 22 Project A has a standard deviation of expected returns of 20%, while Project B's standard deviation is only 10%. A's returns are negatively correlated with both the firm's other assets and the returns on most stocks in the economy, while B's returns are positively correlated. Therefore, Project A is less risky to a firm and should be evaluated with a lower cost of capital. Question 23 A Division A project with an 11% return. Division A should accept only projects with returns greater than 10%, while Division B should accept only projects with returns greater than 14%. Question 24 The cost of equity is generally harder to measure than the cost of debt because there is no stated, contractual cost number on which to base the cost of equity.

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