#1.Choose the Most Correct answer for relative costs of components of a firm’s capital structure. Where: RS = Rate investors demand on a firm’s STOCK RD = Rate investors demand on a firm’s DEBT (i.e. the Yield to Maturity of the firm’s debt). WACC = The firm’s Weighted Average Cost of Capital t = the firm’s tax rate. “<" means "Less Than" ">” means “Greater Than or equal to”a. WACC > RS > RDb. RS < RD(1-t) < RDc. RS > RD > WACCd. None of these relationships is correct.e. RS > RD > RD(1-t)#2.Assuming that a firm pays taxes a relatively small increas in the DEBT to EQUITY Ratio should result in:a. A decrease in the firm’s WACC and a decrease in the value of the firm.b. An increase in the firm’s WACC and a decrease in the value of the firm.c. An increase in the firm’s WACC and an increase in the value of the firm.d. A decrease in the firm’s WACC and an increase in the value of the firm.e. No change in the value of the firm’s WACC or value.#3.The bonds your company just issued carry a yield to maturity of 9% and you have preferred stock outstanding which pays a 7% dividend yield. Your company has a tax rate of 33%. The president of your company has just suggested to you that you issue more preferred stock and buy back your bonds. What should you tell her?a. Bad idea. Since the cost of preferred is lower than the cost of the debt your cost of capital will go down by using more preferred.b. Good idea. Since the cost of preferred is lower than the cost of the debt your cost of capital will go down by using more preferred.c. Bad idea. Since the after-tax cost of debt is lower than the after-tax cost of the preferred your cost of capital will go up by using more preferred.d. Bad idea. Since the after-tax cost of debt is lower than the after-tax cost of the preferred your cost of capital will go down by using more preferred.e. Good idea. Since the after-tax cost of debt is lower than the after-tax cost of the preferred your cost of capital will go down by using more preferred.#4.Consider this example:ACME Roadkill Inc. is looking at setting up a new manufacturing plant in Alien Landing NV. The company bought some land four years ago for $7 million in anticipation of using it as a training facility but the company has since decided to lease facilities elsewhere. The land was appraised last week for $5.2 million.The company now wants to build its new manufacturing plant on this land; the plant will cost $12 million to build and the site requires $1 million worth of draining used oil before it is suitable for construction.What is the proper cash flow amount that they should use as the initial investment in fixed assets when evaluating this project?a. $0 the cost of the land is a sunk cost.b. $5.2 million the appraised value of the land.c. $7 million the original cost of the land.d. $17.2 million the appraised value of the land plus construction costs.e. $18.2 million the appraised value of the land plus improvements and draining.f. $20 million the original cost of the land plus improvements plus the draining cost.
