Question

true or false

14. Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in favor of the project with the higher NPV.

13. Consider the WACC formula, there are three methods for estimating the cost of common stock from retained earnings: 1) the CAPM method, 2) the DCF method, and 3) the preferred stock-yield-plus-risk-premium method.

11.In the Weighted Average Cost of Capital formula, the after-tax cost of debt is equal to one minus the marginal tax rate multiplied by the interest rate on new debt.

10. Consider the WACC formula, if the required rate of return on preferred stock increases, holding all else equal, the WACC increases.

Answer 1

true or false

14. Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in favor of the project with the higher NPV.

This is TRUE

13. Consider the WACC formula, there are three methods for estimating the cost of common stock from retained earnings: 1) the CAPM method, 2) the DCF method, and 3) the preferred stock-yield-plus-risk-premium method.

This is FALSE. The first two methods are correct. The third method is bond yield plus risk premium method.

11.In the Weighted Average Cost of Capital formula, the after-tax cost of debt is equal to one minus the marginal tax rate multiplied by the interest rate on new debt.

This is TRUE

10. Consider the WACC formula, if the required rate of return on preferred stock increases, holding all else equal, the WACC increases.

This is TRUE