Reading 45: Cost of Capital LOSc习题精选 2010, budgeting, including, structure, capital

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LOS c: Describe alternative methods of calculating the weights used in the WACC, including the use of the company's target capital structure.

Hans Klein, CFA, is responsible for capital projects at Vertex Corporation. Klein and his assistant, Karl Schwartz, were discussing various issues about capital budgeting and Schwartz made a comment that Klein believed to be incorrect. Which of the following is most likely the incorrect statement made by Schwartz?

A) “Net present value (NPV) and internal rate of return (IRR) result in the same rankings of potential capital projects.”

B) “The weighted average cost of capital (WACC) should be based on market values for the firm’s outstanding securities.”

C) “It is not always appropriate to use the firm’s marginal cost of capital when determining the net present value of a capital project.”

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It is possible that the NPV and IRR methods will give different rankings. This often occurs when there is a significant difference in the timing of the cash flows between two projects. A firm’s marginal cost of capital, or WACC, is only appropriate for computing a project’s NPV if the project has the same risk as the firm.

 

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Carlos Rodriquez, CFA, and Regine Davis, CFA, were recently discussing the relationships between capital structure, capital budgets, and net present value (NPV) analysis. Which of the following comments made by these two individuals is least accurate?

A) “For projects with more risk than the average firm project, NPV computations should be based on the marginal cost of capital instead of the weighted average cost of capital.”

B) “The optimal capital budget is determined by the intersection of a firm’s marginal cost of capital curve and its investment opportunity schedule.”

C) “A break point occurs at a level of capital expenditure where one of the component costs of capital increases.”

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The marginal cost of capital (MCC) and the weighted average cost of capital (WACC) are the same thing. If a firm’s capital structure remains constant, the MCC (WACC) increases as additional capital is raised.