Corporate Finance and cost of capital - Assignment Example

Financial Management 534 Quiz 5 Question 1 Answer: Put option.Question 3 Answer: Options time to maturity. Question 6 Answer: $1,989.75 Question 7 Answer: The life of the option is increased, that is, the time until it expires is lengthened. Question 17 Answer: The accept/reject decision depends on the firms risk-adjustment policy. If Norris policy is to increase the required return on a riskier-than-average project to 3% over risk free rate, then it should reject the project. Question 21 Answer: Division A project with an 11% return.

Question 24 Answer: If a firm has been suffering accounting losses that are expected to continue into the foreseeable future, and therefore its tax rate is zero, then it is possible for the after-tax cost of preferred stock to be less than the after-tax cost of debt. Question 25 Answer: Since M and W move counter cyclically to one another, if they merged, the merged firms WACC would be less than the simple average of the two firms WACCs (Easley and O’Hara 1570).Question 26 Answer: The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project, that is, it is the after-tax cost of debt if debt is to be used to finance the project or the cost of equity if the project will be financed with equity (Amihud and Mendelson 24) Question 28 Answer: Accept too many low-risk projects and too few high-risk projects.

Question 29 The correct statement is: Cost should be assigned to retained earnings due to the opportunity  Work CitedAmihud, Yolk, and Harris Mendelson. “The liquidity route to a lower cost of capital.” Journal of Applied Corporate Finance 12.7 (2000): 5–25. Print.Easley, Douglas, and Mellen O’Hara. “Information and the Cost of Capital.” The Journal of Finance 59.4 (2004): 1553-1583. Print.