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LOS b: Explain how the weighted average cost of capital (WACC) for a corporation can be adjusted to incorporate pension risk and discuss the potential consequences of not making this adjustment.
Q1. When the pension assets are included in the weighted average cost of capital (WACC) which of the following statements is most accurate?
A) The WACC will decrease and the firm will be able to accept more projects, increasing the overall value of the firm.
B) The WACC will increase and the firm will accept projects with a higher rate of return, increasing the overall value of the firm.
C) The firm’s debt-to-equity ratio will fall.
Q2. The following information is regarding the Plexi Corporation.
- Plexi’s equity beta = 2.5
- Risk free rate = 3%
- Market risk premium = 5%
- Debt = $19 million
- Equity = $21 million
- Pension assets beta = .70
- Pension assets = $15 million
The firm’s total liabilities and equities beta before including the pension liabilities into the balance sheet and the operating assets beta after incorporating the pension assets into the balance sheet would be:
Total L&E beta Operating assets beta
A) 0.95 1.04
B) 1.31 1.04
C) 1.31 0.95
Q3. After incorporating the risk of the pension assets into the overall capital structure, the weighted average cost of capital (WACC) for capital budgeting purposes is closest to:
A) 7.8.
B) 8.2.
C) 6.5. | 
发表于 2009-3-5 11:39
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