Richard works for a firm that is expanding into a completely new line of business. He has been asked to determine an appropriate Weighted Average Cost of Capital (WACC) for an average-risk project in the expansion division. Richard finds two publicly traded stand-alone firms that produce the same products as his new division. The average of the two firms’ betas is 1.25. Further, he determines that the expected return on the market portfolio is 13.00% and the risk-free rate of return is 4.00%. Richard’s firm finances 50% of its projects with equity and 50% with debt, and has a before-tax cost of debt of 9% and a corporate tax rate of 30%. What is the WACC for the new line of business?

A. about 12.64%

B. about 13.00%

C. about 10.78%

D. about 11.29%

Question 2 of 40 2.5/ 2.5 Points

In capital budgeting, the __________ is the appropriate discount rate to use when calculating the Net Present Value (NPV) of an average-risk project.

A. Weighted Average Cost of Capital (WACC)

B. Internal Rate of Return (IRR)

C. cost of debt

D. cost of Equity

Question 3 of 40 2.5/ 2.5 Points

Which of the following is the proper way to adjust the cost of debt to estimate the after-tax cost of debt?

A. Rd ÷ (1 + Tc)

B. Rd ÷ (1 – Tc)

C. Rd × (1 – Tc)

D. Rd × (1 + Tc)

Question 4 of 40 2.5/ 2.5 Points

If all projects are assigned the same discount rate for purposes of evaluation, which of the following could occur?

A. Low-risk projects could be rejected when in fact they are good investment choices.

B. High-risk projects could be accepted when in fact they are poor investment choices.

C. High-risk projects could be accepted when in fact they are good investment choices.

D. All of the choices could occur when using a single discount rate for all projects.

Question 5 of 40 2.5/ 2.5 Points

The __________ is the return that the bank or bondholder demands on new borrowing.

A. Internal Rate of Return (IRR.

B. Weighted Average Cost of Capital (WACC)

C. cost of equity

D. cost of debt

Question 6 of 40 0.0/ 2.5 Points

Use the security market line to determine the required rate of return for the following firm’s stock. The firm has a beta of 1.25, the required return in the market place is 10.50%, the standard deviation of returns for the market portfolio is 25.00%, and the standard deviation of returns for your firm is also 25.00%.

A. 13.13%

B. 10.50%

C. 31.25%

D. There is not enough information to answer this question.

Question 7 of 40 2.5/ 2.5 Points

Which of the statements below is NOT true?

A. Preferred stock is a form of hybrid equity financing.

B. Retained earnings are a form of hybrid equity financing.

C. Common stock is a form of equity financing.

D. Corporate bonds are a form of debt financing.

Question 8 of 40 2.5/ 2.5 Points

Red Rider Custom Built Bikes (RRB. Inc. has a new project that will require the company to borrow $1,000,000. RRB has made an agreement with three lenders for the needed financing. Valley Bank will give $500,000 and wants 9% interest on the loan. Mountain View Bank will give $300,000 and wants 11% interest on the loan. Desert Bank will give $200,000 and wants 12% interest on the loan. What is the Weighted Average Cost of Capital (WACC) for this $1,000,000?

A. 10.67%

B. 10.20%

C. 10.00%

D. 9.67%

Question 9 of 40 2.5/ 2.5 Points

The cost of capital is __________ .

A. the cost of debt in a firm that finances with both debt and equity

B. the cost of each financing component multiplied by that component’s percent of the total borrowed

C. another name for the Internal Rate of Return (IRR)

D. all of the above

Question 10 of 40 2.5/ 2.5 Points

Your firm has issued a 20-year $1,000.00 par value semiannual 10% coupon bond that sells for $1,000 in the market place. The proceeds from the sale of the bond issue are $975.00 per bond. What is your firm’s yield to maturity on this new bond issue? Use a financial calculator to determine your answer.

A. 5.15%

B. 10.16%

C. 10.30%

D. 10.00%

Question 11 of 40 2.5/ 2.5 Points

It is necessary to assign the appropriate cost of capital for each individual project that reflects that project’s __________ when doing capital budgeting.

A. life

B. cash flows

C. riskiness

D. managers

Question 12 of 40 2.5/ 2.5 Points

__________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings.

A. Capital structure

B. Cost of capital

C. Working capital management

D. Net Present Value (NPV)