Economic risk is an unsystematic risk that can be diversified by the investors.
Answer the following statement true (T) or false (F)
False
Economic risk is systematic risk, which is nondiversifiable, whereas firm-specific risk is unsystematic risk, and is diversifiable. The systematic risk is the relevant risk of an investment. It is a systematic risk and cannot be diversified. See 8-6: Different Types of Risk
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For textile production, the U.S. capital/labor ratio is 0.5 and China's capital/labor ratio is 0.02. This means that
a. the United States is the relatively capital scarce country. b. China is the relatively labor scarce country. c. China is the relatively capital abundant country. d. the United States is the relatively capital abundant country.
Regarding discontinued operations, which of the following statements is incorrect?
A) Gains and losses on the sale of plant assets and equipment are reported as Other Income and (Expenses). B) A loss on discontinued operations is reported with an addition for the applicable income tax. C) The sale of an identifiable division of the business is reported on the income statement under the category Discontinued Operations. D) The Discontinued Operations category of the income statement includes information about segments of the business that have been sold.
Which of the following would violate the Double Jeopardy Clause?
A. The government reopens a case after new incriminating evidence is found against an acquitted person. B. A person is tried for a case similar to a case from which he was acquitted earlier. C. A case reaches a hung jury in court and the government reopens the case with a new jury. D. The criminal act violates more than one jurisdiction and each jurisdiction tries the accused in turn.
Solid Structures, Inc., a manufacturer of steel wire reinforcements and pre-stressed concrete strands for the concrete construction industry, wants to determine its WACC. Today, 1/1/2018, the firm issued 7,000 bonds that will mature in 1/1/2038 with $1,000 face value. These bonds will pay a 9% coupon rate semiannually and are currently selling for $950. The firm has 100,000 preferred shares of stock outstanding with a book value of $40, but currently selling for $50 per share. The most recent preferred and common dividends were $3.50 and $2.50 per share, respectively. The firm’s EPS five years ago was $8.00 and it expects to increase its next dividend payment by the implied 5-year earnings per share growth rate. Flotation costs on debt and preferred equity are both 3%, but 7% in the
case of common stocks. The common stock is selling today for $25 and the firm’s tax rate and payout ratio are 40% and 25%, respectively. The firm has 200,000 shares of common stock outstanding with the same book value as that of its preferred stock. a) Calculate the book value and market value weights for each source of capital. b) Calculate the component costs of capital (i.e., debt, preferred equity, retained earnings, and new common equity). c) Determine the weighted average costs of capital using both the market and the book value weights.