Question 1

Calculate all MCC break points for the following information:

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Question 2

Calculate the AT kd, ks, kn for the following information:

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Question 3

Your firm's k_sis 10%, k_dis 6% before taxes, tax rate is 40%. Given the following balance sheet, calculate the firm's after tax WACC: Total assets = $25,000 Total debt = 15,000 Total equity = 10,000

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Question 4

Your firm is in the 30% tax bracket with a before-tax required rate of return on its equity of 13% and on its debt of 10%. If the firm uses 60% equity and 40% debt financing, calculate its after-tax WACC.

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Question 5

Why is the cost of preferred shares the rate of return investors require on a company's new preferred shares PLUS the cost of issuing the shares when the cost of equity can be either the cost of current equity OR the cost of equity plus the cost of issuing the shares?

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Question 6

Explain the difference between WACC and MCC.

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Question 7

Sometimes adding more debt to the capital structure will provide no appreciable benefit to shareholders even if the company has a low level of debt and the perceived level of risk would not increase if even more debt was added. Why?

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Question 8

You have three projects costing $100,000. The total capital budget is $300,000. The returns on the projects and the marginal costs of capital are as follows:
  Which projects should be undertaken? Why?

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Question 9

Would a firm use WACC or MCC to identify which new capital budgeting projects should be selected?

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Question 10

In recent years, Canadian regulators have turned down fee increase requests from regulated utilities that argued they needed to charge higher fees to provide adequate returns to their shareholders. The regulating bodies told them to leave their fees where they were and to increase their debt levels. Why?

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Question 11

Debt is almost always the cheapest component of a company's cost of capital. Why don't companies have debt weightings of 90 or even 95%?

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Question 12

What determines whether to use the dividend growth approach or the CAPM approach to calculate the cost of equity?

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Question 13

What are breakpoints of financing in marginal cost of capital determination?

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Quiz 3: Essential Concepts in Finance: Part B