7. If Wolves Entertainment Company is acting in the best interests of stockholders (following the primary goal of the fi

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7. If Wolves Entertainment Company is acting in the best
interests of stockholders (following the primary goal of the firm),
which of the following is the optimal (best) capital budget for the
firm?
a. Debt = 80%, Equity = 20%, EPS = $3.28, Stock price = $19.70,
Cost of Debt = 5.8%, , Capital Budget $ 16 Million
b. Debt = 70%, Equity = 30%, EPS = $3.42, Stock price = $20.40,
Cost of Debt = 5.0%, , Capital Budget $ 14 Million
c. Debt = 50%, Equity = 50%, EPS = $3.05, Stock price = $22.90,
Cost of Debt = 3.5%, Capital Budget $ 10 Million
d. Debt = 60%, Equity = 40%, EPS = $3.18, Stock price = $21.20,
Cost of Debt = 4.0%, Capital Budget $ 12 Million
e. Debt = 40%, Equity = 60%, EPS = $2.95, Stock price = $16.50,
Cost of Debt = 3.0%, Capital Budget $ 8 Million
8. Which of the following statements is most correct?
Since stockholders do not generally pay corporate taxes,
corporations should focus on before-tax cash flows when calculating
the weighted average cost of capital (WACC).
When calculating the weighted average cost of capital, firms
should include the cost of accounts payable.
When calculating the weighted average cost of capital, firms
should rely on marginal costs rather than historical costs of
capital.
Answers a and b are correct
None of the answers above is correct.