12. The cost of new common stock (external equity) is generally higher than the
ID: 2800015 • Letter: 1
Question
12. The cost of new common stock (external equity) is generally higher than the cost of retained earnings (internal equity) because of a. Tax effects b. Investors' required returns c. Flotation costs d. Coupon payments 13·The yield to maturity is one way to determine a. The cost of retained earnings. b. The pre-tax cost of debt c. The cost of preferred stock. d. The weighted average cost of capital. 14. Which of the following is an advantage of the payback method? The payback method a. Incorporates all possible cash flows. b. Directly accounts for the time value of money c. Measures the liquidity of an investment project d. Directly accounts for differences in risk among projects. 15. Which of the following is a criticism of the discounted payback as a capital budgeting technique? a. b. c. d. It ignores cash flows occurring after the payback point. It does not incorporate the time value of money. The reinvestment assumption associated with the cash flows is unrealistic. Both A and B are valid criticisms. 16. Fixit, Inc. is evaluating two projects that are under consideration for future investments. Project J has an NPV of $25,000 and has an IRR of 14%. Project K has an $50,000 and has an IRR of 10%. The cost of capital for the firm is 8%. The projects are mutually exclusive and are considered to be average risk projects. Which (if any) of the projects should be accepted? a. Both projects should be accepted. b. Neither project should be accepted. c. Project J should be accepted since it has the highest IRR. d. Project K should be accepted since it has the highest NPVExplanation / Answer
12. The cost of new common stock financing is higher than the cost of retained earnings (internal equity) because of - Floatation costs
Option c
13. The yield to maturity is one way to determine The pre tax cost of Debt
Option b
14. Which of the following is an advantage of payback method. the payback method measures the liquidity of an investment project.
Option c
15. Which is the criticism of discounted payback as a capital budgeting technique? Both A and B are valid criticisms.
Option D
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