"Corporate Finance":Cost of Capital

来源: 正保会计网校编辑：小鞠橘桔 2020/10/12 09:15:26　字体：大小

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Questions 1:

An analyst gathered the following information about a company that expects to fund its capital budget without issuing any additional shares of common stock:

Corporate Finance:Cost of Capital

If no significant size or timing differences exist among the project(s) and both projects have the same risk as the company’s existing projects, which project(s) should be accepted?

A 、The warehouse project only

B 、The equipment project only

C、 Both projects

Questions 2:

A company’s optimal capital budget most likely occurs at the intersection of the:

A、 net present value and internal rate of return profiles.

B、 marginal cost of capital and investment opportunity schedule.

C、 marginal cost of capital and net present value profiles.

View answer resolution

【Answer to question 1】B

【analysis】

B is correct. The company’s weighted average cost of capital (WACC) is calculated as WACC = 0.5(6%) + 0.1(10%) + 0.4(15%) = 10%. In this scenario, the company should accept projects that have an internal rate of return greater than the cost of capital. The equipment project’s IRR exceeds the WACC. The warehouse project does not.

C is incorrect. Accept projects that have an internal rate of return greater than the cost of capital. The equipment project’s IRR exceeds the WACC. The warehouse project does not.

A is incorrect. Accept projects that have an internal rate of return greater than the cost of capital. The equipment project’s IRR exceeds the WACC. The warehouse project does not

【Answer to question 2】B

【analysis】

B is correct. The point at which the marginal cost of capital intersects the investment opportunity schedule is the optimal capital budget.

A is incorrect. The point at which the marginal cost of capital intersects the investment opportunity schedule is the optimal capital budget.

C is incorrect. The point at which the marginal cost of capital intersects the investment opportunity schedule is the optimal capital budget.

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