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34 A firm’s WACC can be correctly used to discount the expected cash
flows of a new project when that project:
will be financed with the same proportions of debt and equity as those
currently used by the overall firm.
will be financed solely with internal equity.
35. The cost of preferred stock:
is set equal to the pretax cost of debt since it is a fixed income security.
is ignored by all firms when computing WACC.
is generally calculated using the overall firm’s beta.
is equal to the stock’s dividend yield.
should be adjusted for taxes when c omputing WACC.
36. When computing WACC, you should use the:
pretax cost of debt because most corporations pay taxes at the same tax
rate.
aftertax cost of debt because interest is tax deductible.
pretax cost of debt because it is the actual rate the firm is paying
bondholders.
current yield because it is based on the current market price of debt.
pretax yield to maturity because it considers the current market price of
debt.
37 All else constant, the net present value of a typical investment project
increases when:
all cash inflows occur during the last year instead of periodically throughout
a project’s life.
each cash inflow is delayed by one year.
the initial cost of a project increases.
the discount rate increases.
the rate of return decreases.
38. Graham and Harvey (2001) found that _____ were the two most
popular capital budgeting methods.
IRR and payback