19. The difference between the WACC formula and the WAFC formula is a. WACC uses

Question

19. The difference between the WACC formula and the WAFC formula is

a. WACC uses preferred stock as the middle part.

b. WAFC does not have the tax break on debt.

c. WACC uses smaller numbers than WAFC.

d. The portfolio weights on WACC have to total to one, but not on WAFC.

e. WAFC combines common and preferred, but WACC accounts for them separately.

20. Rank the following from first to last as guidelines for the Compromise Dividend Policy:

I.    Avoid cutting the dividend

II.   Maintain a target debt/equity ratio.

III.   Avoid rejecting positive NPV projects in order to pay a dividend.

III, II, I

I, III, II

III, I, II

II, III, I

II, I, III

Explanation / Answer

19)

WACC means weighted average cost of capital. WAFC means weighted average flotation cost. Flotations costs are not adjusted for tax savings but interest payments are adjusted for tax saving.

Hence, correct option is b. WAFC does not have the tax break on debt.

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