Part B: Multiple-Choice Questions 6. Which one of the following statements relat

Question

Part B: Multiple-Choice Questions 6. Which one of the following statements related to WACC is correct for a firm that uses debt in its capital structure? The WACC should decrease as the firm's debt-equity ratio increases. The weight assigned to preferred stock decreases as the market value of the stock a. b. ncreases The WACC will decrease as the corporate tax rate decreases. The weight of equity is based on the number of shares outstanding and the book value per share. The WACC will remain constant unless a firm retires some of its debt. c. d. e. 7. Highway Express has paid annual dividends of $1.05, S1.10, S1.12, $1.15, and $1.25 over the past five years, respectively. What is the average dividend growth rate? a. 2.47 percent b. 4.49 percent c. 3.60 percent d. 5.98 percent e. 4.39 percent 121

Explanation / Answer

6. Option A
With increase in D/E ratio WACC will decrease as interest on debt is tax deductible.
7.

Year Dividend paid Growth Rate =(Dividend @end -Dividend @ beg,)Dividend @ beg) 1 $1.05 2 $1.10 4.76% 3 $1.12 1.82% 4 $1.15 2.68% 5 $1.25 8.70% Average growth rate = (4.76% + 1.82% + 2.68% + 8.70%)/4 4.49%

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