Question

Which of the following statements is incorrect?

Group of answer choices

Left-hand side of the accounting balance sheet shows the book value of the firm’s assets, based on historical costs.

All the answers are correct except one.

The difference between the expected return on the market and the risk-free rate is known as the market risk premium.

Current cost of long-term debt is the appropriate cost of debt for WACC calculations.

The best method to use when estimating risk-free interest rate is the weighted average cost of capital approach.

Answer #1

Ans- **Option E-** The best method to use when
estimating risk-free interest rate is the weighted average cost of
capital approach

As WACC is used to compute the Cost of Capital of firm which takes Cost of Debt, Cost of Preferred Stock & Cost of Equity with there respective capital weight structure. The above three cost carry sufficient amount of risk which means that Cost of Capital have appropriate portion of risk.

Thus WACC is not the method to estimate risk-free interest as WACC does not have risk free cost portion in it.

Which of the following statements is NOT correct?
a. When estimating the cost of debt, don’t use the coupon rate
on existing debt.
b.Use the current interest rate on new debt. When estimating the
risk premium for the CAPM approach, don’t subtract the current
long-term T-bond rate from the historical average return on common
stocks.
c. Use the target capital structure to determine the weights. If
you don’t know the target weights, then use the current book value
of equity...

Which of the following statements is correct? Group of answer
choices I
f a company's tax rate increases, then, all else equal, its
weighted average cost of capital will decline.
WACC calculations should be based on the before-tax costs of all
the individual capital components.
A change in a company's target capital structure cannot affect
its WACC. An increase in the risk-free rate will normally lower the
marginal costs of both debt and equity financing.
Flotation costs associated with issuing...

Which statement is true?
Group of answer choices
Increase in the market risk premium will affect the capital
structure weights.
The repurchase of preferred stock will decrease the weight of
debt.
An increase in the market value of preferred stock will increase
the firm's WACC.
The cost of preferred stock is unaffected by tax rate.

Which of the following is true about a firm’s capital
structure?
Group of answer choices
A firm’s current or actual capital structure can differ from its
target (or desired) capital structure because issuing new debt and
stock can be lumpy.
In general, it is better to use the weights in a firm’s Target
Capital Structure rather than the weights based on its Balance
Sheet Capital Structure when estimating its WACC.
A firm’s capital structure is a how a firm is...

Suppose that Free People is considering an investment in its
online portal. The investment will be evaluated using the firm’s
WACC. The firm’s cost of debt is 4.0%, tax rate is 35%, and beta is
.91. The risk-free rate is 2.5% and the market risk premium is 5%.
The firm’s shares currently sell for $8/share and there are 455
million shares outstanding. The firm has $2.2 billion in debt that
currently sells at par value and $2.0 billion in book...

Which of the following statements is incorrect?
Group of answer choices
We should take into account of opportunity costs.
Only incremental cash flows are relevant to the accept/reject
decision.
Capital budgeting decisions is based on accounting earnings.
Sunk costs should never be considered.

The Security Market Line
Group of answer choices
usually has a negative slope.
shows the highest historical return earned by an asset.
is a minimum standard of return for an asset.
is calculated by taking the risk-free rate of return and
multiplying it by beta.

A given firm’s beta is .7 (a little on the safe side); risk free
rates are 2%; and the market, in general, returns 8%. The company
has $20 million in debt and $15 million in equity where the
interest rate on the debt is 7% and the tax rate is 35%. Using the
Capital Asset Pricing Method for determining the cost of equity,
what is the firm’s weighted average cost of capital?

1. As of today, McCormick's market capitalization (E) is
$14,237,510,000. Market value of equity (E), also known as market
cap, is calculated using the following equation: market cap = share
price x shares outstanding.
2. McCormick's book value of debt is $3,237,150,000. Book value
of debt (D) is calculated as follows: book value of debt = last
two-year average of current portion of long-term debt + last
two-year average of long-term debt & capital lease
obligation.
3. Cost of Equity...

Explain the standard CAPM method to estimating cost of equity,
and how we estimate the market risk premium and risk-free rate (and
why we use this method) Where might we find a beta estimate?
Explain the potential problems with this approach. Explain why we
might need to rely on data from the company’s 10-k to determine the
cost of debt, rather than using only the firm’s market-traded
bonds. Why would we want to know more than the interest expense
reported...

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