Question

1. The following information contains the target weights for a company’s capital structure and the estimated cost for each of its capital components:

Target Weights Cost

Debt 40% 8.1% p.a. (pre-tax)

Preferred stock 5% 8.9%

Common stock 55% 14.3%

The company’s tax rate is 21%. What is the company’s weighted average cost of capital (WACC)?

A. 8.74%

B 9.73%

C. 11.55%

D. 10.87%

E. 14.83%

2. If a proposed investment project would make use of land which a company currently owns, the project should be charged with the opportunity cost of the land.

A. True

B. False

3. During the last year a firm reported EBIT of $2,779, operating costs of $53,720, depreciation of $1,024, sales of $59,130 and taxes of $742. What is the firm's operating margin? Do not round your intermediate calculations.

A. 4.22%

B. 4.74%

C. 4.21%

D. 4.70%

E. 4.67%

4. Assuming everything else remains the same, which of the following would increase a company’s current ratio?

A. An increase in net fixed assets

B. An increase in notes payable

C. A decrease in accrued liabilities

D. A decrease in inventory

E. An increase in accounts payable

Answer 1

1. WACC =

=weight of debt * after tax cost of debt + weight of preference* cost of preference + weight of equity *cost of equity

=0.4*0.081*(1- 0.21) + 0.05*0.089 + 0.55*0.143

= 0.0256 + 0.0045 + 0.0787

= 10.87%

So, the correct option is option D.

2. TRUE. This land could have been used for other projects as well, so the firm has to pay the opportunity costs of using the land.

So, the correct option is option A.

3.Operating margin : Operating income/ Sales

= $2,779/ $59,130

= 4.7%

So, the correct option is option D.

4. Current ratio = Current assets/ Current liabilities

The current ratio will increase by increasing the current assets and decreasing the current liabilities.

So, the correct option is option C.