Guys this is very Important Please make sure of all the answers.
1)The cost of retained earnings can be less than, equal to, or greater than the cost of new common stock, depending on taxes, flotation costs, investors’ attitudes, etc.
A) True
B) False
2) Hilliard Corp. needs to estimate its cost of capital. The company’s CFO has the following information:
The company’s target capital structure is 25% debt and 75% equity; its tax rate is 40%.
Long-term bonds yield 8%; the cost of retained earnings is 12.63%, that of new common stock is 13.36%.
Since the firm expects to have no retained earnings, it plans to issue new common stock.
Hilliard’s weighted average cost of capital is:
a. 10.67%.
b. 11 .22%.
c. 11.47%.
d. 12.02%.
e. 12.56%.
3) If a company uses the same discount rate to evaluate all projects,
A) it will become riskier over time, and its value will decline.
B ) it will become riskier over time, and its value will rise.
C) it will become less risky over time, and its value will rise.
D ) it will become less risky over time, and its value will decline.
E) there is no reason to expect its risk position or value to change.
4) Tropicali’s overall average cost of capital is 10%. Its frozen foods division is riskier than the firm as a whole, its fresh produce division has risk similar to the firm’s, and its institutional foods division has less risk. Tropicali adjusts for both divisional and project risk by adding/subtracting 2 percentage points to/from its corporate cost of capital. The hurdle rate for a low-risk project in the frozen foods division is:
a. 6%.
b. 8%.
c. 10%.
d. 12%.
e. 14%.