Deck 11: The Cost of Capital

Question 1

Alloy Supply Co.has a new project that will require the company to borrow $3,000,000.Acme has made an agreement with three lenders for the needed financing.First National Bank will give $1,500,000 and wants 6% interest on the loan.Banner Bank will give $1,000,000 and wants 9% interest on the loan.Western National Bank will give $500,000 and wants 7% interest on the loan.What is the weighted average cost of capital to acquire the $3,000,000?

A)8.17%
B)11.17%
C)7.33%
D)7.17%

Answer 1

D

Question 2

The weighted average cost of capital is ________.

A)the average of the cost of each financing component,weighted by the proportion of each component
B)the cost of capital for the firm as a whole
C)made up of three financing components: the cost of debt,the cost of preferred stock,and the cost of equity
D)All of the above

Answer 2

D

Question 3

Which of the items below is sometimes termed hybrid equity financing?

A)Retained earnings
B)Preferred stock
C)Callable bonds
D)Variable rate bonds

Answer 3

B

Question 4

Of the following,which is NOT a source of funds for a company?

A)Common shareholders
B)Commercial banks
C)Preferred stockholders
D)All are sources of funds for companies.

Question 5

When a company "borrows" money from the owners by selling common stock or using internal funds,it is called equity financing.

Question 6

Which of the following is NOT considered a part of the firm's capital structure?

A)Long-term debt
B)Retained earnings
C)Inventory
D)Preferred stock

Question 7

A firm's capital structure can be determined by examining which parts of the firm's balance sheet?

A)The long-term assets
B)The debt and equity
C)The short-term assets and liabilities
D)None of the above because a firm's capital structure is best observed on the income statement.

Question 8

The cost of capital is ________.

A)the cost of debt in a firm that finances with both debt and equity
B)the cost of each financing component multiplied by that component's percent of the total borrowed
C)another name for the IRR
D)All of the above

Question 9

Which of the following would be classified as equity financing for a firm?

A)Preferred shareholders,banks,and nonbank lenders
B)Nonbank lenders,common shareholders,and commercial banks
C)Preferred shareholders,common shareholders,and retained earnings
D)Suppliers,nonbank lenders,and commercial banks

Question 10

When a company borrows money from a bank or sells bonds,it is called ________.

A)capital structure financing
B)stock financing
C)equity financing
D)debt financing

Question 11

The textbook labels preferred stock as "hybrid equity financing." Identify and explain the features of preferred stock that give it the designation of "hybrid equity financing."

Question 12

________ refers to the way a company finances itself through some combination of loans,bond sales,preferred stock sales,common stock sales,and retention of earnings.

A)Capital structure
B)Cost of capital
C)Working capital management
D)NPV

Question 13

Which of the statements below is NOT true?

A)Preferred stock is a form of hybrid equity financing.
B)Retained earnings are a form of hybrid equity financing.
C)Common stock is a form of equity financing.
D)Corporate bonds are a form of debt financing.

Question 14

When a company borrows from a bank or sells bonds,it is called equity financing.

Question 15

Which of the following would be classified as debt lenders for a firm?

A)Preferred shareholders,banks,and nonbank lenders
B)Nonbank lenders,common shareholders,and commercial banks
C)Preferred shareholders,common shareholders,and suppliers
D)Suppliers,nonbank lenders,and commercial banks

Question 16

The choice of the borrowing proportion makes up the capital budgeting of the firm.

Question 17

In capital budgeting,the ________ is the appropriate discount rate to use when calculating the NPV of an average risk project.

A)WACC
B)IRR
C)cost of debt
D)cost of equity

Question 18

Dakota Drilling Inc.(DD)has a new project that will require the company to borrow $5,000,000.MM has made an agreement with three lenders for the needed financing.First National Bank will give $1,000,000 and wants 6% interest on the loan.Texas Bank will give $3,000,000 and wants 7% interest on the loan.Chase Bank will give $1,000,000 and wants 8% interest on the loan.What is the weighted average cost of capital for this $5,000,000?

A)10.67%
B)10.20%
C)8.00.00%
D)7.00%

Question 19

The ________ is the cost of each financing component multiplied by that component's percent of the total funding amount.

A)NPV
B)IRR
C)cost of capital
D)cost of debt

Question 20

When estimating the cost of debt financing from bonds,a firm can use the yield-to-maturity as the before-tax cost of debt.

Question 21

Use the dividend growth model to determine the required rate of return for equity.Your firm intends to pay a dividend of $2.25 per share one year from now,has a recent price of $40.20 per share,and anticipates a growth rate in dividends of 3.00% per year for the foreseeable future.

A)8.76%
B)8.60%
C)8.44%
D)There is not enough information to answer this question.

Question 22

Your firm has preferred stock outstanding that pays a current dividend of $3.00 per year and has a current price of $35.90.You anticipate that the economy will grow steadily at a rate of 2.00% per year for the foreseeable future.What is the market required rate of return on your firm's preferred stock?

A)10.82%
B)8.36%
C)7.59%
D)There is not enough information to answer this question.

Question 23

In capital budgeting,the appropriate decision rule for an average-risk project is to accept if the ________ is greater than the WACC.

A)NPV
B)IRR
C)cost of equity
D)cost of debt

Question 24

Which of the following is an advantage of the dividend growth approach over the SML in estimating the required return on equity?

A)The dividend growth model uses market information but the SML does not.
B)Dividend growth is known,whereas estimating beta for the SML is an art form.
C)It is easy to fit flotation costs into the dividend growth model but not the SML.
D)All are advantages of the dividend growth model for estimating the required return on equity.

Question 25

Pricing preferred stock is most similar to pricing ________.

A)constant growth common stock
B)a perpetuity
C)a zero-coupon bond
D)a three-month Treasury bill

Question 26

Which of the following would NOT be considered a cost of debt financing?

A)The required return on a bank loan
B)The required return on preferred stock
C)The yield-to-maturity of a bond issue
D)The required return on money borrowed from a venture capitalist

Question 27

Your firm has preferred stock outstanding that pays a current dividend of $2.50 per year and has a current price of $25.00.Currently,preferred stock makes up approximately 5% of your firm's long-term financing.What is the market required rate of return on your firm's preferred stock?

A)8.36%
B)9.00%
C)9.30%
D)10.00%

Question 28

The riskiness of a future cash flow is measured by ________,and these are all components of the SML.

A)the firm's standard deviation,correlation,and the market risk premium
B)beta,the market risk premium,and the firm's standard deviation
C)the market risk premium,beta,and correlation
D)beta,the market risk premium,and the risk-free rate

Question 29

Your firm has just issued a 10-year $1,000.00 par value,6% coupon semiannual bond for a net price of $964.00.What is the yield to maturity? Use a financial calculator to determine your answer.

A)3.16%
B)6.50%
C)6.32%
D)6.00%

Question 30

Your firm has issued a 20-year $1,000.00 par value semiannual 10% coupon bond that sells for $1,000 in the market place.The proceeds from the sale of the bond issue are $975.00 per bond.What is your firm's yield to maturity on this new bond issue? Use a financial calculator to determine your answer.

A)5.15%
B)10.16%
C)10.30%
D)10.41%

Question 31

Your firm has just issued a 15-year $1,000.00 par value,10% annual coupon bond for a net price of $964.00.What is the yield to maturity? Use a financial calculator to determine your answer.

A)10.60%
B)10.49%
C)10.44%
D)10.16%

Question 32

The cost of debt could be which of the following?

A)The required return on money borrowed as a long-term loan from a bank
B)The required return on money borrowed from a venture capitalist
C)The yield-to-maturity on money raised by selling bonds
D)All of the choices above could be considered the cost of debt.

Question 33

An investment banker's fees are part of the ________ realized for issuing new debt or equity.

A)flotation costs
B)opportunity costs
C)revenues
D)benefits

Question 34

The ________ is the return that the bank or bondholder demands on new borrowing.

A)IRR
B)WACC
C)cost of equity
D)cost of debt

Question 35

Use the dividend growth model to determine the required rate of return for equity.Your firm intends to issue new common stock.Your investment bankers have determined that the stock should be offered at a price of $20.00 per share and that you should anticipate paying a dividend of $0.50 in one year.If you anticipate a constant growth in dividends of 4.00% per year and the investment banking firm will take 10.00% per share as flotation costs,what is the required rate of return for this issue of new common stock?

A)6.78%
B)7.08%
C)7.19%
D)10.20%

Question 36

Use the security market line to determine the required rate of return for the following firm's stock.The firm has a beta of 1.20,the required return in the market place is 10.00%,and the risk-free rate of return is 1.50%.

A)11.70%
B)10.70%
C)7.20%
D)2.80%

Question 37

Use the dividend growth model to determine the required rate of return for equity.Your firm intends to issue new common stock.Your investment bankers have determined that the stock should be offered at a price of $45.00 per share and that you should anticipate paying a dividend of $1.50 in one year.If you anticipate a constant growth in dividends of 3.00% per year and the investment banking firm will take 5.00% per share as flotation costs,what is the required rate of return for this issue of new common stock?

A)6.51%
B)6.83%
C)7.08%
D)There is not enough information to answer this question.

Question 38

Use the dividend growth model to determine the required rate of return for equity.Yesterday your firm paid a dividend of $1.50 per share.Further,the recent stock price is $31.82 per share,and you anticipate a growth rate in dividends of 4.00% per year for the foreseeable future.

A)8.90%
B)8.71%
C)9.09%
D)There is not enough information to answer this question.

Question 39

A/An ________ facilitates the issuing and sale of bonds and for this service is paid a fee.

A)commercial banker
B)investment banker
C)dealer
D)broker

Question 40

Use the security market line to determine the required rate of return for the following firm's stock.The firm has a beta of 1.05,the required return in the market place is 11.50%,the standard deviation of returns for the market portfolio is 20.00%,and the standard deviation of returns for your firm is also 20.00%.

A)13.13%
B)10.50%
C)31.25%
D)There is not enough information to answer this question.

Question 41

It is easier to incorporate the impact of flotation costs on the cost of equity capital in using the dividend growth model rather than the Security Market Line.

Question 42

Flotation costs reduce the cost of borrowing funds for the firms.

Question 43

Theo has been assigned the task of determining the cost of capital for his division of the firm.His first step is to determine the cost of debt.The firm has $1,000 par value bonds outstanding that have an annual coupon rate of 8.00% and make semiannual payments.These bonds have twenty-three years remaining to maturity and currently sell for $1,133.42.What is the yield-to-maturity on these bonds? Use a financial calculator to determine your answer.

Question 44

For estimating NPV,the IRR is the appropriate discount rate to use for an average-risk project.

Question 45

The cost of retained earnings is the cost of issuing new common stock without flotation costs.

Question 46

Phillip Enterprises Inc.needs to determine its cost of equity capital.Use the following information to estimate the firm's cost of equity using both the security market line and the dividend growth model.The current market price of stock is $22.89,the risk-free rate is 4.00%,the required return on the market portfolio is 13.50%,the firm has a constant growth rate in dividends of 3.00% per year,current dividends are $2.00,and the firm's beta is 0.90.

Question 47

The cost of retained earnings ________.

A)is the loss of the dividend option for the owners
B)is the cost of issuing new common stock without the flotation costs
C)is the appropriate cost of capital for the shareholders
D)All of the above

Question 48

Rogue Rotors has debt with a market value of $350,000,preferred stock with a market value of $100,000,and common stock with a market value of $650,000.If debt has a cost of 7%,preferred stock a cost of 9%,common stock a cost of 13%,and the firm has a tax rate of 30%,what is the WACC?

A)8.64%
B)9.12%
C)10.06%
D)10.88%

Question 49

When calculating the after-tax weighted average cost of capital (WACC),which of the following costs is adjusted for taxes in the equation?

A)The before-tax cost of equity
B)The before-tax cost of debt
C)The before-tax cost of preferred stock
D)The after-tax cost of debt

Question 50

Two techniques for determining the cost of equity include using:
1.The Security Market Line,and 2.The Internal Rate of Return.

Question 51

Which of the following are tax-deductible expenses for corporations?

A)Interest expenses
B)Preferred stock dividends
C)Common stock dividends
D)All are tax-deductible for corporations.

Question 52

Which of the following is the proper way to adjust the cost of debt to estimate the after-tax cost of debt?

A)R_d ÷ (1 + T_c)
B)R_d ÷ (1 - T_c)
C)R_d × (1 - T_c)
D)R_d × (1 + T_c)

Question 53

To find the after-tax cost of debt for a corporation,one needs to multiply the before-tax cost of debt by (1 + T_c),where T_c = the corporate tax rate.

Question 54

Define flotation costs and explain how they are used when estimating a firm's yield-to-maturity.

Question 55

Rogue Drafting has debt with a market value of $450,000,preferred stock with a market value of $150,000,and common stock with a market value of $350,000.If debt has a cost of 8%,preferred stock a cost of 10%,common stock a cost of 12%,and the firm has a tax rate of 30%,what is the WACC?

A)8.65%
B)9.12%
C)9.33%
D)9.46%

Question 56

When evaluating an average-risk project using IRR,a firm should use the WACC as the hurdle rate.

Question 57

When determining the cost of bond financing a firm must determine the net proceeds from the sale of the bond less the flotation cost charged by the investment banker to estimate the yield-to-maturity.

Question 58

The following information comes from the Galaxy Construction balance sheet.The value of common stock is $10,000,retained earnings equals $7,000,total common equity equals $17,000,preferred stock has a value of $3,000,and long-term debt totals $15,000.If the cost of debt is 8.00%,preferred stock has a cost of 10.00%,common stock has a cost of 12.00%,and the firm has a corporate tax rate of 30%,calculate the firm's WACC adjusted for taxes.

A)10.11%
B)10.00%
C)9.09%
D)There is not enough information to answer this question.

Question 59

The following information comes from the balance sheet of Roamer Enterprises.The value of common stock is $60,000,retained earnings equal $40,000,total common equity equals $100,000,preferred stock has a value of $10,000 and long-term debt totals $120,000.For purposes of estimating the firm's WACC,what are the weights of long-term debt,preferred stock,and equity?

A)D/V = 52.17%,PS/V = 43.48%,and E/V = 4.35%
B)D/V = 52.17%,PS/V = 4.35%,and E/V = 43.48%
C)D/V = $120,000,PS/V = $10,000,and E/V =$100,000
D)There is not enough information to answer this question.

Question 60

The ________ of an asset or liability is its cost carried on the balance sheet.

A)market value
B)book value
C)hybrid value
D)theoretical value

Question 61

Generally speaking,when the information is available,investors prefer to use ________ rather than ________ when evaluating a firm.

A)past data; current data
B)market values; book values
C)current data; market values
D)book values; market values

Question 62

It is necessary to assign the appropriate cost of capital for each individual project that reflects that project's ________ when doing capital budgeting.

A)life
B)cash flows
C)riskiness
D)managers

Question 63

When possible,investors and analysts prefer to use book value to market value for estimating the WACC.

Question 64

The formula for the adjusted WACC = $\frac { D } { V }$ × R_d + $\frac { \mathrm { PS } } { \mathrm { V } }$ × R_ps + $\frac { E } { V }$ × R_e × (1 - T_c).

Question 65

Investors ________ for estimating the WACC.

A)are indifferent between using market and book value
B)prefer book value to market value
C)prefer market value to book value
D)prefer a mix of book and market value

Question 66

The following market information was gathered for the ACME corporation.The common stock is selling for $40.00 per share and there are 100,000 shares outstanding.Retained earnings equal $400,000,preferred stock has 1,000 shares outstanding selling at $120.00 per share,and 500 outstanding long-term bonds are selling for $1,035.00 each.For purposes of estimating the firm's WACC,what are the market value weights of long-term debt,preferred stock,and equity?

A)D/V = 11.16%,PS/V = 2.59%,and E/V = 86.25%
B)D/V = 10.27%,PS/V = 2.38%,and E/V = 87.34%
C)D/V = 10.78%,PS/V = 3.08%,and E/V = 86.14%
D)D/V = 33.33%,PS/V = 33.33%,and E/V = 33.33%

Question 67

Equity is an attractive form of financing for a firm because it has additional tax advantages for the firm compared to debt.

Question 68

When estimating a weighted average cost of capital,a firm can use either book values or market values for estimating the value of the component sources of capital.Where would you find book values,and what value do they represent? How would you calculate market values? In general,would you prefer to use market or book values for estimating the WACC? Under what circumstances would you use book values?

Question 69

Your firm has an average-risk project under consideration.You choose to fund the project in the same manner as the firm's existing capital structure.If the cost of debt is 8.00%,the cost of preferred stock is 11.00%,the cost of common stock is 14.00%,and the WACC adjusted for taxes is 13.00%,what is the NPV of the project,given the expected cash flows listed here? $$\begin{array} { | l | c | c | c | c | } \hline \text { Category } & \mathrm { T } _ { 0 } & \mathrm {~T} _ { 1 } & \mathrm {~T} _ { 2 } & \mathrm {~T} _ { 3 } \\\hline \text { Investment } & - \$ 2,000,000 & & & \\\hline \text { NWC } & - \$ 250,000 & & & \$ 250,000 \\\hline \text { Operating Cash Flow } & & \$ 850,000 & \$ 850,000 & \$ 850,000 \\\hline \text { Salvage } & & & & \$ 50,000 \\\hline \text { Total Incremental Cash Flow } & - \$ 2,250,000 & \$ 850,000 & \$ 850,000 & \$ 1,150,000 \\\hline\end{array}$$

A)-$74,121
B)$-35,105
C)$2,214,895
D)$2,479,604

Question 70

Takelmer Industries has a different WACC for each of three types of projects.Low-risk projects have a WACC of 8.00%,average-risk projects a WACC of 10.00%,and high-risk projects a WACC of 12%.Which of the following projects do you recommend the firm accept? $$\begin{array} { | c | c | c | } \hline \text { Project } & \text { Level of Risk } & \text { IRR } \\\hline \text { A } & \text { Low } & 9.50 \% \\\hline \text { B } & \text { Average } & 8.50 \% \\\hline \text { C } & \text { Average } & 7.50 \% \\\hline \text { D } & \text { Low } & 9.50 \% \\\hline \text { E } & \text { High } & 14.50 \% \\\hline \text { F } & \text { High } & 17.50 \% \\\hline \text { G } & \text { Average } & 11.50 \% \\\hline\end{array}$$

A)A,B,C,D,G
B)B,C,E,F,G
C)A,D,E,F,G
D)A,B,C,D,E,F,G

Question 71

The following market information was gathered for the Rogue Corporation.The firm has 5,000 bonds outstanding,each selling for $1,050.00 with a required rate of return of 7.00%.Rogue has 3,000 shares of preferred stock outstanding,selling for $60.00 per share and 80,000 shares of common stock outstanding,selling for $24.00 per share.If the preferred stock has a required rate of return of 9.00% and the common stock requires a 11.00% return,and the firm has a corporate tax rate of 20%,calculate the firm's WACC adjusted for taxes.

A)6.77%
B)9.23%
C)9.53%
D)There is not enough information to answer this question because there is no information provided about the amount of retained earnings held by the firm.

Question 72

Your firm has an average-risk project under consideration.You choose to fund the project in the same manner as the firm's existing capital structure.If the cost of debt is 10.00%,the cost of preferred stock is 13.00%,the cost of common stock is 16.00%,and the WACC adjusted for taxes is 13.00%,what is the NPV of the project,given the expected cash flows listed here? $$\begin{array} { | l | c | c | c | c | } \hline \text { Category } & \mathrm { T } _ { 0 } & \mathrm {~T} _ { 1 } & \mathrm {~T} _ { 2 } & \mathrm {~T} _ { 3 } \\\hline \text { Investment } & - \$ 3,000,000 & & & \\\hline \text { NWC } & - \$ 350,000 & & & \$ 350,000 \\\hline \text { Operating Cash Flow } & & \$ 950,000 & \$ 950,000 & \$ 950,000 \\\hline \text { Salvage } & & & & \$ 50,000 \\\hline \text { Total Incremental Cash Flow } & - \$ 3,350,000 & \$ 950,000 & \$ 950,000 & \$ 1,350,000 \\\hline\end{array}$$

A)-$917,930
B)-$829,685
C)$0
D)$2,520,315

Question 73

To estimate the market value of a publicly traded bond that has a broad market with frequent trading,it is usually best to multiply the number of bonds outstanding by the bond par value.

Question 74

Your firm has an average-risk project under consideration.You choose to fund the project in the same manner as the firm's existing capital structure.If the cost of debt is 8.50%,the cost of preferred stock is 9.00%,the cost of common stock is 11.50%,and the WACC adjusted for taxes is 10.50%,what is the NPV of the project,given the expected cash flows listed here? $$\begin{array} { | l | c | c | c | c | } \hline \text { Category } & \mathrm { T } _ { 0 } & \mathrm {~T} _ { 1 } & \mathrm {~T} _ { 2 } & \mathrm {~T} _ { 3 } \\\hline \text { Investment } & - \$ 800,000 & & & \\\hline \text { NWC } & - \$ 50,000 & & & \$ 50,000 \\\hline \text { Operating Cash Flow } & & \$ 350,000 & \$ 350,000 & \$ 350,000 \\\hline \text { Salvage } & & & & \$ 20,000 \\\hline \text { Total Incremental Cash Flow } & - \$ 850,000 & \$ 350,000 & \$ 350,000 & \$ 420,000 \\\hline\end{array}$$

A)$914,675
B)$98,415
C)$64,675
D)$48,415

Question 75

Market values require multiplying the ________ of each component source of capital by the ________.

A)price; quantity
B)book value; quantity
C)price; book value
D)None of the above

Question 76

Builder's Warehouse,Inc has an adjusted WACC of 9.70%.The company has a capital structure consisting of 50% equity and 50% debt,a cost of equity of 13.00%,a before-tax cost of debt of 8.00%,and a tax rate of 20%.Builder's Warehouse is considering expanding by building a new outlet in a distant city and considers the project to be riskier than current operations.The firm estimates the existing beta to be 1.0,the required return on the market portfolio to be 12.00%,the risk-free rate to be 3.00%,and the beta for the new project to be 1.25.Given this information,and assuming the cost of debt will not change if the firm undertakes the new project,what adjusted WACC should be used in the decision-making?

A)10.45%
B)12.60%
C)13.32%
D)9.70%

Question 77

If all projects are assigned the same discount rate for purposes of evaluation,which of the following could occur?

A)Low-risk projects could be rejected when in fact they are good investment choices.
B)High-risk projects could be accepted when in fact they are poor investment choices.
C)High-risk projects could be accepted when in fact they are good investment choices.
D)All of the choices could occur when using a single discount rate for all projects.

Question 78

Your firm has an average-risk project under consideration.You choose to fund the project in the same manner as the firm's existing capital structure.If the cost of debt is 11.00%,the cost of preferred stock is 12.00%,the cost of common stock is 17.00%,and the WACC adjusted for taxes is 15.00%,what is the IRR of the project,given the expected cash flows listed here? Use a financial calculator to determine your answer. $$\begin{array} { | l | c | c | c | c | } \hline \text { Category } & \mathrm { T } _ { 0 } & \mathrm {~T} _ { 1 } & \mathrm {~T} _ { 2 } & \mathrm {~T} _ { 3 } \\\hline \text { Investment } & - \$ 2,000,000 & & & \\\hline \text { NWC } & - \$ 350,000 & & & \$ 350,000 \\\hline \text { Operating Cash Flow } & & \$ 950,000 & \$ 950,000 & \$ 950,000 \\\hline \text { Salvage } & & & & \$ 50,000 \\\hline \text { Total Incremental Cash Flow } & - \$ 2,350,000 & \$ 950,000 & \$ 950,000 & \$ 1,350,000 \\\hline\end{array}$$

A)About 16.97%
B)About 12.02%
C)About 11.16%
D)About 8.94%

Question 79

Your firm has an average-risk project under consideration.You choose to fund the project in the same manner as the firm's existing capital structure.If the cost of debt is 8.00%,the cost of preferred stock is 11.00%,the cost of common stock is 14.00%,and the WACC adjusted for taxes is 13.00%,what is the IRR of the project given the expected cash flows listed here? Use a financial calculator to determine your answer. $$\begin{array} { | l | c | c | c | c | } \hline \text { Category } & \mathrm { T } _ { 0 } & \mathrm {~T} _ { 1 } & \mathrm {~T} _ { 2 } & \mathrm {~T} _ { 3 } \\\hline \text { Investment } & - \$ 2,000,000 & & & \\\hline \text { NWC } & - \$ 250,000 & & & \$ 250,000 \\\hline \text { Operating Cash Flow } & & \$ 850,000 & \$ 850,000 & \$ 850,000 \\\hline \text { Salvage } & & & & \$ 50,000 \\\hline \text { Total Incremental Cash Flow } & - \$ 2,250,000 & \$ 850,000 & \$ 850,000 & \$ 1,150,000 \\\hline\end{array}$$

A)About 12.13%
B)About 13.00%
C)About 24.95%
D)There is not enough information to answer this question.

Question 80

Your firm has an average-risk project under consideration.You choose to fund the project in the same manner as the firm's existing capital structure.If the cost of debt is 8.50%,the cost of preferred stock is 9.00%,the cost of common stock is 11.50%,and the WACC adjusted for taxes is 10.50%,what is the IRR of the project,given the expected cash flows listed here? Use a financial calculator to determine your answer. $$\begin{array} { | l | c | c | c | c | } \hline \text { Category } & \mathrm { T } _ { 0 } & \mathrm {~T} _ { 1 } & \mathrm {~T} _ { 2 } & \mathrm {~T} _ { 3 } \\\hline \text { Investment } & - \$ 800,000 & & & \\\hline \text { NWC } & - \$ 50,000 & & & \$ 50,000 \\\hline \text { Operating Cash Flow } & & \$ 350,000 & \$ 350,000 & \$ 350,000 \\\hline \text { Salvage } & & & & \$ 20,000 \\\hline \text { Total Incremental Cash Flow } & - \$ 850,000 & \$ 350,000 & \$ 350,000 & \$ 420,000 \\\hline\end{array}$$

A)About 11.50%
B)About 12.30%
C)About 14.67%
D)There is not enough information to answer this question.