The cost of capital used to estimate a firm’s value

The cost of capital used to estimate a firm’s value

The cost of capital used to estimate a firm's value
Subject: Business    / Finance   
Question
1.    The cost of capital used to estimate a firm's value is the simple arithmetic average cost of component capitals regardless of their weights

2.    If a project's IRR is greater than its cost of capital (discount rate) the project's NPV must be positive.
3.    The payback period method doesn't consider cash flows beyond the payback year.
4.    For a firm that has 50% debt and 50% equity use the following information.
The cos of debt = 7%, tax rate = 35%, and the cost of common equity = 12%
The firm's WACC = .5x.07x(1-.35) + .5x.12 = .08275 =~ .083
5.    The bond-yield-plus-risk-premium method uses a judgmental risk premium.
6.    A project that costs $1,000 is expected to generate $400 per year over the next 3 years. If the discount rate is 5%, the NPV is positive.
7.    Capital expansion occurs when management places a constraint on the size of the firm's capital budget during a particular period.
8.    The most relevant risk of the project is the market risk.
9.    Use the following information.
A project's initial cost = $5,000
Cash flow = $600 per year for 10 years
Cost of capital = 4%
Then, the project's IRR is less than the cost of capital (4%).
10.    In order to find a firm's WACC, it is common to use the book value of each capital.
11.    Different securities have different required rates of return due to their differences in risk.
12.    A firm's WACC is not affected by its dividend policy.
13.    The modified IRR assumes that projects' cash flows are reinvested at IRR itself.
14.    Consider the following four mutually exclusive projects.
Project Q: NPV = $123, Project U: NPV = $369, Project W: NPV = $210, Project T: NPV = $300
All four projects should be chosen because they all have positive NPVs.
15.    The cost of debt is equal to the bond's current yield.
16.    A 3-year project that costs $1 million has a 12% IRR. If the project's cost of capital is 10%, its NPV is greater than $20,000.
17.    Consider the following two projects, A and B.
Project A: IRR = 16%, NPV = $2.3 million
Project B: IRR = 9%, NPV = $3.1 million
Project A should be chosen because it will maximize the firm's value.
18.    When you use the regression technique to find a divisional beta it is called the pure play method.
19.    If flotation costs are quite substantial, corporate managers have to consider them because they actually increase the cost of debt.
20.    The discounted payback method considers cash flows beyond the payback period.