1. The NPV method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.
True or false
2. One minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt equals the cost of debt.
True
False
3. Unsaved If the IRR of normal Project X is greater than the IRR of mutually exclusive (and also normal) Project Y, we can conclude that the firm should always select X rather than Y if X has NPV > 0.
a) True
b) False
4. If a company's target capital structure is 50% debt and 50% common equity, which would be a correct statement?
a) The cost of reinvested earnings typically exceeds the cost of new common stock.
b) The interest rate used to calculate the WACC is the average after-tax cost of all the company's outstanding debt as shown on its balance sheet.
c) The WACC is calculated on a before-tax basis.
d) The cost of equity is always equal to or greater than the cost of debt.
5. You are given the following returns on "the market" and Stock F during the last 3 years. Calculate beta using data for Years 1 and 2 and then, after Year 3, calculate a new beta for Years 2 and 3. How different are those two betas, i.e., what's the value of beta 2 beta 1 (Hint: You can find betas using the rise-over-run method, or using your calculator's regression function.) Year Market Stock F 1 6.10% 6.50% 2 12.90% 3.70% 3 16.20% 21.71%
a) 7.89
b) 8.74
c) 9.20
d) 9.66