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If a firm changes its capital structure in such a way that the firm now has relatively more debt and less equity than it did before, but the change is not large enough to affect the required returns on the debt or on the equity, the firm’s weighted average cost of capital should increase.

According to the trade-off theory of capital structure, the optimal capital structure is found by balancing the additional gains from leverage against the added costs from financial distress.

If the risk-free rate is 2.70%, the market risk premium is 6.30%, and the expected return on the market is 9.00%, what is the estimated cost of equity using the Capital Asset Pricing Model for a stock with a beta of 0.92?

All else equal, one would expect a company whose stock has a low beta to have a higher weighted average cost of capital (WACC) than a company whose stock has a high beta.

Carlita’s Tasty Tacos is considering opening a new location in the large city that currently has two other locations.  The combined sales at the other two locations are $1,245,000 annually.  The new location is expected to generate sales of $450,000 in the first year with 4% sales growth per year for the next 7 years.  If the operating profit margin is 40% and the tax rate is 10%, what is the net after-tax cash flow for the new unit for the first year of operations?

In the MasterDecker case, which projects were positive NPV when using correct estimations of the cash flows?

In the MasterDecker case, which projects had Payback Periods of less than one year when using correctly estimated cash flows?

Use the following cash flows for years 0-7 to calculate the Payback Period for Project Florentine.  CF 0          (161,000) CF 1              43,000 CF 2              41,000 CF 3              40,000 CF 4              38,000 CF 5              34,000 CF 6              34,000 CF 7              28,000

If two firms have identical net profit margins and identical total asset turnover ratios, the firm with the higher equity multiplier will have a higher return on equity.

Use the following Weighted Average Cost of Capital (WACC) and the cash flows for years 0-4 to calculate the Net Present Value (NPV) for Project Freefall.  WACC 5% CF 0         (131,000) CF 1             45,000 CF 2             47,000 CF 3             49,000 CF 4             38,000