What is the WACC for a firm with 40% debt, 20% preferred stock and 40%
equity if the respective costs for these components are 6% after-tax, 12% after-
tax, and 18% before-tax? The firm's tax rate is 35%.
Answer
Selected Answer: 11.16%
Correct Answer: 12.00%
Response WACC = (.4 x .06) + (.2 x .12) + (.4 x .18)
Feedback: = .024 + .024 + .072
= 12.0%
Question 2
2 out of 2 points
Why is it important to include the tax effect into cost of capital computations
for firms with debt financing?
Answer
Selected Firms pay taxes on the outstanding principal amount of the
Answer: debt.
Correct Taxable income is reduced by the amount of the interest
Answer: expense.
Response incorrect
Feedback:
Question 3
, 2 out of 2 points
Changing the capital structure by adding debt will not:
Answer
Which of the following statements is incorrect concerning the equity
component of the WACC?
Answer
Selected Answer: The value of retained earnings is not
included.
Correct Answer: There is a tax shield such as with debt.
Response incorrect
Feedback:
Question 5
2 out of 2 points
, With respect to the WACC:
Answer
Selected it is used to value all new projects.
Answer:
Correct this benchmark discount rate is adjusted for the
Answer: riskiness of the project.
Response incorrect
Feedback:
Question 6
2 out of 2 points
Which of the following is NOT a cost to the firm of increasing debt
financing:
Answer
Selected Answer: The cost of common equity will
decrease.
Correct Answer: The cost of common equity will
decrease.
Response correct
Feedback:
Question 7
2 out of 2 points
What is the yield to maturity on Dotte Inc's bonds if its after-tax cost of
debt is 10% and its tax rate is 35%?
Answer
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