Questions from Financial Management

Q: What are the main components of a company’s cost of capital?

What are the main components of a company’s cost of capital? Rank these components from lowest to highest cost (a) on a before-tax and (b) on an after-tax cost basis, and explain why these differenc...

Q: What weights should be used when you calculate the WACC? Discuss

What weights should be used when you calculate the WACC? Discuss the choice between book value and market value weights, and the role of the “target” capital structure for a firm whose actual capital...

Q: Describe each of the following methods for estimating the cost of equity

Describe each of the following methods for estimating the cost of equity: (a) the CAPM, (b) DCF, and (c) the bond-yield-plus-risk-premium. Where can you obtain inputs for each of these methods, and...

Q: Distinguish among beta (or market) risk, within-firm

Distinguish among beta (or market) risk, within-firm (or corporate) risk, and stand-alone risk for a project being considered for inclusion in a firm’s capital budget.

Q: How do flotation costs affect the cost of capital? Are these

How do flotation costs affect the cost of capital? Are these costs about the same for each of the three capital components? How do they change as the firm raises larger and larger amounts of capital,...

Q: For a given firm, why does WACC change over time?

For a given firm, why does WACC change over time? Can the firm control the factors that lead to changes in the WACC and thus determine its WACC?

Q: At any one time, should the same WACC be used to

At any one time, should the same WACC be used to evaluate each of a company’s capital budgeting projects? If not, how should the WACC be adjusted for the different projects?

Q: How do project cash flows as calculated in this chapter affect a

How do project cash flows as calculated in this chapter affect a firm’s corporate free cash flows as defined in Chapter 6 and then used in Chapter 9 to calculate a firm’s value? How does a proposed pr...

Q: Define (a) externalities and (b) sunk

Define (a) externalities and (b) sunk costs, and then give examples of each that might be involved in a proposal by an energy company to build a new coal-fired electric power generating unit. How wo...

Q: If Congress shortened depreciation lives for tax purposes, how would this

If Congress shortened depreciation lives for tax purposes, how would this affect the energy project’s NPV, assuming nothing else changes?