Company A Company B Market Value of Equity $700,000 $900,000 Market Value of Debt $300,000 $200,000 Cost of Equity 8% 10% Cost of Debt 1.5% 3% Tax Rate 30% 25% Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected retu...
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1
Company A Compan
Market Value of Equity $700,000 $900,000
Market Value of Debt $300,000 $200,000
Cost of Equity 8% 10%
Cost of Debt 1.5% 3%
Tax Rate 30% 25%
Based solely on their current weighted average cost of capital,
which company should pursue an investment opportunity with an
expected return of 7%?
Only Company B
Both Company A and Company B
Only Company A
Neither Company A nor Company B
CONCEPT
The WACC
2
Preparing a cash flow forecast helps a company to avoid __________.
What must be forecasted first in order to prepare the pro forma
income statement?
Cost of goods sold
Sales
Expenses
Net income
CONCEPT
Forecasting the Income Statement
4
Select the statement that correctly explains the relationship
between interest rates and present or future value.
Assuming other variables stay the same, if the interest rate decreases, the
future value of an investment increases.
Assuming other variables stay the same, if the interest rate decreases, the
present value of an investment decreases.
The interest rate and the future value of an investment are inversely related.
Assuming other variables stay the same, if the interest rate increases, the
future value of an investment increases.
CONCEPT
Additional Detail on Present and Future Values
5
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