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FA TEST 3, FINANCIAL MODELING FULLY SOLVED -10.
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FA TEST 3, FINANCIAL MODELING FULLY SOLVED -10.
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FA TEST 3, FINANCIAL MODELING FULLY SOLVED #10Target Weights for Capital Sources—Problem
Which of the following methods for estimating the weights for calculating a firm's WACC
is least acceptable?
A. Current proportions of debt and equity based on balance sheet values.
B. Industry average weights for debt and equity.
C. Firm's announced target capital structure weights. - correct answer A. Current
proportions of debt and equity based on balance sheet values.
Assume a firm uses a constant WACC to select investment projects rather than
adjusting the projects for risk. If so, the firm will tend to:
A. Accept profitable, low-risk projects and accept unprofitable, high-risk projects.
B. Accept profitable, low-risk projects and reject unprofitable, high-risk projects.
C. Reject profitable, low-risk projects and accept unprofitable, high-risk projects. -
correct answer C. Reject profitable, low-risk projects and accept unprofitable, high-risk
projects.
In calculating the weighted average cost of capital (WACC), which of the following
statements is least accurate?
A. The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon
rate on outstanding debt.
B. Different methods for estimating the cost of common equity might produce different
results.
C. The cost of preferred equity capital is the preferred dividend divided by the price of
preferred shares. - correct answer A. The cost of debt is equal to one minus the
marginal tax rate multiplied by the coupon rate on outstanding debt.
To participate in the upside of the business, I should invest in______; to receive a fixed
payment, I should invest in either________.
A. Common equity; common equity or preferred stock
B. Debt; common equity or preferred stock
C. Common equity; Debt or preferred stock - correct answer C. Common equity; Debt or
preferred stock
Which of the following causes of an increase in ROE is most likely a positive sign for a
firm's equity investors?
A. A firm issues debt to repurchase equity
B. Net income is increasing at a faster rate than the book value of equity
C. Net income is decreasing at a slower rate than the book value of equity - correct
answer B. Net income is increasing at a faster rate than the book value of equity
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