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    WACC, Cash flow, Cost of preferred stock, bankruptcy

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    25. Which of the following is not true regarding the cost of retained earnings?
    it is relevant to the WACC
    does not require new funds to be raised
    has associated flotation costs
    has a cost, which is the opportunity cost associated with stockholder funds

    26. A project has the following cash flows. What is the internal rate of return?
    Year 0 1 2 3
    Cash Flow -$195,600 $99,800 $87,600 $75,300
    less than 5%
    between 5 and 15%
    between 15 and 18%
    more than 21%

    27. Which one of the following is a correct statement regarding a firm's weighted average cost of capital (WACC)?
    the WACC can be used as the required return for all new projects.
    the WACC of a leveraged firm will decrease when the tax rate decreases.
    an increase in the market risk premium will tend to decrease a firm's WACC.
    the WACC is a starting point for the subjective approach to setting discount rates.
    a reduction in the risk level of a firm will tend to increase the firm's WACC.

    28. The six percent preferred stock of FKH Manufacturing is selling for $62 a share. What is the firm's cost of preferred stock, if the tax rate is 34 percent and the par value per share is $100?
    5.98%
    7.06%
    8.05%
    9.68%
    10.10%

    29. Which one of the following statements is true concerning a bankruptcy?
    a Chapter 7 bankruptcy is a reorganization proceeding.
    a "prepack" is intended to shorten the time a firm spends in bankruptcy.
    the absolute priority rule applies to both Chapter 7 and Chapter 11 bankruptcy proceedings, and must be adhered to by the courts.
    creditors cannot force a firm into bankruptcy, even though they might like to do so.
    a reorganization plan, can only be approved if the firm's creditors all agree with the plan.

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    Solution Preview

    See attached file.

    25. Which of the following is not true regarding the cost of retained earnings?

    has associated flotation costs
    ( As funds are internally generated, hence there is no flotation cost)

    26. A project has the following cash flows. What is the internal rate of return?
    Year 0 ...

    Solution Summary

    Response discusses the WACC, Cash flow, Cost of preferred stock, bankruptcy

    $2.19

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