The marginal cost of capital (MCC) is the composite cost of the last dollar of new capital raised.

Most of the time, because of the nature of risk, making adjustments to cash flows or discount rates is not enough for financial managers. They want to know the sources and possible effects of certain risks of a project. They want to measure a project’s risks coming from various sources rather than in general manner. Sensitivity analysis, scenario and simulation analysis, and decision trees are used for this purpose. However, one or more of these analyses sometimes lead(s) financial managers to consider real options available in a capital investment project because in reality there are various types of uncertainties that exist about these projects. The correct answer is E.

Retained earnings are another method of internal sources of finance and it is basically an accumulation of profits by a company for its expansion and diversification activities. The advantages of retained earnings are stated below:

• Retained earnings are most useful to expansion and diversification of the business activities.
• Retained earnings are one of the least costly sources of finance since it does not involve any floatation cost as in the case of raising funds by issuing different types of securities.
• If the companies use equity finance they have to pay a dividend. Instead, if the companies use debt finance, they have to pay interest. However, if the company uses retained earnings as sources of finance, they need not pay any fixed obligation regarding the payment of dividend or interest.
• Retained earnings allow the financial structure to remain completely flexible. The company need not raise loans for further requirements if it has retained earnings.
• When the company uses the retained earnings as the sources of finance for their financial requirements, the cost of capital is very cheaper than the other sources of finance. Hence the value of the share will increase.
• Retained earnings provide opportunities for evasion of excessive tax in a company when it has a small number of shareholders.

As can also be understood from the information given the statements in the options I, II, III and V are correct, so the correct answer is D.

The statement “When the company uses the retained earnings as the sources of finance for their financial requirements, the cost of capital is more expensive than the other sources of finance.” is not correct, because “when the company uses the retained earnings as the sources of finance for their financial requirements, the cost of capital is very cheaper than the other sources of finance.” Hence the value of the share will increase.

The weighted average cost of capital (WACC) is the average cost of the different types of capital employed by the firm. Where wD is the weight of the debt component, wCE is the weight of the equity component. T is the tax rate and after-tax cost of debt component is calculated by multiplying the before-tax cost of debt (kD) by the tax deductibility. Cost of equity component is denoted as kCE in the above equation. The correct answer is E.

"Retained earnings" and "Lower cost of capital" are among the advantages of common stock.

1. The WACC estimation should be based on the market values of the capital components.
2. The weights of the capital components should not be computed on book values.
3. In the evaluation of the capital budgeting projects, the WACC of the firm should be used as a decision criterion.

All of the statements above are true about weighted average cost of capital.

The bond-yield-plus-risk-premium approach provides a practical but highly subjective solution to the estimation of the cost of equity. The approach is based upon adding up a risk premium over the firm’s bond yield. Thus, the cost of equity is calculated straightforward by the following simple computation:

k= 0.0845 + 0.0315= 0.1160

According to the bond-yield-plus-risk-premium approach, XLM’s expected cost of equity is 11.60%. The correct answer is C.

Discounted payback period technique tells the length of time it takes cumulative present values of cash inflows will be equal to the initial cash outflow.

For funding investments and/or other cash uses by medium and long-term sources, the companies have four different alternatives. These are generally in the forms of bank borrowing, borrowing from special institutions, debt issuance and equity finance, securitization. Therefore, the correct option is D.

ROIC=NOPAT/Capital (ROIC means return on invested capital)

The signaling theory asserts that investors regard an equity issue negatively and usually the stock price falls.

Maximizing the value of the firm is the main objective and the key to wealth maximization lies in the capital structure decisions. In an attempt to find the best practice in attaining this goal, academicians brought up a number of theoretical models:

1. Net income approach
2. Net operating income approach
3. Traditional approach
4. Modigliani and Miller Capital Structure Theory
5. Trade-off theory
6. Signaling theory
7. Agency theory

The correct answer is D.

The advantages of retained earnings are stated below:

• Retained earnings are most useful to expansion and diversification of the business activities.

• Retained earnings are one of the least costly sources of finance since it does not involve any floatation cost as in the case of raising funds by issuing different types of securities.

• If the companies use equity finance they have to pay a dividend. Instead, if the companies use debt finance, they have to pay interest. However, if the company uses retained earnings as sources of finance, they need not pay any fixed obligation regarding the payment of dividend or interest.

• Retained earnings allow the financial structure to remain completely flexible. The company need not raise loans for further requirements if it has retained earnings.

• When the company uses the retained earnings as the sources of finance for their financial requirements, the cost of capital is very cheaper than the other sources of finance. Hence the value of the share will increase.

• Retained earnings provide opportunities for evasion of excessive tax in a company when it has a small number of shareholders.

The correct answer is D.

Estimating cash flows is the first step of calculating the Net Present Value.

LIBOR is a benchmark rate that represents the interest rate at which banks offer to lend funds to one another in the international interbank market for short-term loans.

The par value of a bond is almost always the same as the face value, and the terms are used interchangeably, so the correct answer is A.

Common stock, also named as equity shares, represnts equity or an ownership position in a corporation.

Collateral is a general term that frequently means securities that are pledged as security for payment of debt.

A lease is a contractual agreement between a lessee and lessor establishing that the lessee has the right to use an asset and in return must make periodic payments to the lessor who is the owner of the asset.