For a typical firm, which sequence is correct? All rates are after taxes, and assume the firm operates at its target capital structure. r_s is the cost of retained earnings and r_e is the cost of new equity.

a.

r_e > r_s > WACC > r_d

b.

r_s > r_e > r_d > WACC

c.

WACC > r_e > r_s > r_d

d.

r_d > r_e > r_s > WACC

Clear my choice

Question 2

When working with the CAPM, which factor can be determined with the most precision?

a.

the market risk premium (RP_M)

b.

the beta coefficient, b_i, of a relatively safe stock

c.

the most appropriate risk-free rate, r_RF

d.

the beta coefficient of the market, which is the same as the beta of an average stock

Clear my choice

Question 3

Jackson Inc. uses only equity capital, and it has two equally sized divisions. Division As cost of capital is 10.0%, Division Bs cost is 14.0%, and the composite WACC is 12.0%. All of Division As projects have the same risk, as do all of Division Bs projects. However, the projects in Division A have less risk than those in Division B. Which of the following projects should Jackson accept?

a.

Division B project with a 13% return

b.

Division B project with a 12% return

c.

Division A project with an 11% return

d.

Division A project with a 9% return