Question

Question 16

The cost of capital associated with an investment does not depend on the risk of that investment.

Select one:

True

False

Question 17

Your company purchased a piece of land five years ago for $150,000 and subsequently added $175,000 in improvements. The current book value of the property is $225,000. There are two options for future use of the land: 1) the land can be sold today for $350,000 on a net after-tax basis; 2) your company can destroy the past improvements and build a factory on the land. In consideration of the factory project, what amount (if any) should the land be valued at?

Select one:

a. The sales price of $350,000 less the book value of the improvements.

b. The present book value of $225,000.

c. The original $150,000 purchase price of the land itself.

d. The property should be valued at zero since it is a sunk cost.

e. The after-tax sales value of $350,000.

Question 18

Generally, bankruptcy costs have no impact on a firm’s decision to increase debt financing.

Select one:

True

False

Question 19

Watson's Automotive has a $400,000 bond issue outstanding that is selling at 85 percent of face value. Watson's also has 21,000 shares of common stock outstanding with a market price of $21 a share. What is the weight of the debt as it relates to the firm's weighted average cost of capital?

Select one:

a. 44 percent

b. 42 percent

c. 48 percent

d. 40 percent

e. 41 percent

Question 20

The market value of a firm that invests in projects providing a return less than its WACC should increase over time.

Select one:

True

False

Answer 1