For a Company Whose Target Capital Structure Calls for 50

question 3

Multiple Choice

For a company whose target capital structure calls for 50% debt and 50% common equity,which of the following statements is CORRECT?

• A) The interest rate used to calculate the WACC is the average after-tax cost of all the company's outstanding debt as shown on its balance sheet.
• B) The WACC is calculated on a before-tax basis.
• C) The WACC exceeds the cost of equity.
• D) The cost of equity is always equal to or greater than the cost of debt.
• E) The cost of retained earnings typically exceeds the cost of new common stock.

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Definitions:

Capital Investment Proposals

Suggestions or plans for spending on long-term assets intended to improve a company's profitability in the future.

Cash Payback Period

The duration required for an investment to generate cash flows sufficient to recoup the initial outlay.

Operating Income

Earnings before interest and taxes (EBIT), a measure of a company's profitability from its core operations.

Annual Net Cash Inflows

The amount of cash that an investment or project generates after accounting for all outflows and inflows over a year.