Powell Motors Inc. is considering investing in a project in which the risk is greater than the firm's current risk based on any method for assessing risk. Which of the following should management do when evaluating this project?
a. They should always reject the project, because it will increase the firm's risk level.
b. To take the higher risk level into account, they will need to increase the flotation expenses associated with the project.
c. To take the higher risk level into account, they will need to change the weights on the capital components.
d. To take the higher risk level into account, they will need to use a discount rate that is greater than the cost of capital to evaluate the project.
Which of the following statements is correct?
a. A firm's after-tax cost of preferred stock may be significantly less than its before-tax cost, because issuing preferred stock dividends creates a tax shelter.
b. The market value of a firm's debt and equity will continuously change throughout the day, but the book value of debt and equity tends to stay more stable over time. Consequently, the firm should use the book-value weight to define its optimal capital structure.
c. A company needs to adjust the cost of debt for taxes, because interest payments are tax deductible.