arket Value rather Section 1: Multiple choice (20 points) QUESTION Which of the following statements is CORRECT? (2 points) When estimating WACC, we prefer using capital weights based on Market than Book Value b. When estimating WACC, we prefer using capital weights based on Market Value c. Capital weights based on Book Value reflect the optimal capit Capital weights based on Market Value reflect the optin c. If we use capital weights based on the Target Rat largest WACC. Answer: on Book Value rather tha capital structure of a company on the Target Ratio to set WACC, then wec al structure of a company then we can obtain the erefore, the costs of equity should be QUESTION 2 Which of the following statem e following statements is CORRECT? (2 points) a We should focus on before-tax capital by multiplying (1-tax rate). re-tax capital costs. Therefore, the costs of debt should be adju b. We should focus on before-tax capi adjusted by multiplying (1+tax rate). would focus on after-tax capital costs. Therefore, the costs of equity should be by multiplying (1-tax rate). We should focus on before-tax capital costs. Therefore, the costs of preferred stocks be adjusted by multiplying (1+tax rate). c. We should focus on after-tax capital costs. Therefore, the costs of debt should be adjus by multiplying (1-tax rate). Answer: QUESTION 3 Which of the following statements is CORRECT? (2 points) a The percentage flotation cost associated with issuing new common equity is typically smaller than the flotation cost for new debt. 6. The WACC as used in capital budgeting would be simply the before-tax cost of debt firm plans to use only debt to finance its capital budget during the coming year. c The WACC as used in capital budgeting is an estimate of a company's before-tax co capital d. There is an "opportunity cost" associated with using retained earnings, hence they a "free." The WACC as used in capital budgeting is an estimate of the cost of all the capital a company has raised to acquire its assets. nswer