Multinational Capital Structure and Cost of Capital

Explain capital structure of a firm.

Which is NOT discount rate?

• Hurdle rate

• Cost of Capital

• Opportunity Cost

• Beta

Capital structure refer to firm's mix of long-term debt and equity financing

• TRUE

• FALSE

A firm's WACC

• is the proper discount rate for every project the firms undertakes

• is used to value all of the firms's existing projects

• is a benchmark discount rate that may be adjusted for the riskiness of each project

• is for informational value only and should never be used as a discount rate

The WACC is the return the company needs to earn after tax in order to satisfy all its security holders.

• TRUE

• FALSE

When using the WACC as a discount rate, it is often adjusted upward for riskier projects and downward for safer projects

• TRUE

• FALSE

What is the debt ratio of a firm that has outstanding $15 million in bonds and equity with market value of $35 million?

• 15%

• 30%

• 35%

• 43%

The WACC for a firm with a 65/35 debt/equity split, pre-tax cost of debt, 15% cost of equity, and a 21% tax rate is:

• 9.36%

• 9.94%

• 10.45%

• 13.8%

What is the WACC for a firm with 50% debt that pays 12% on its debt, 20% on its equity and has a 21% tax rate?

• 9.6%

• 12%

• 14.7%

• 16%