1. The weighted average cost of capital is used as a discount rate when making capital budgeting decisions because:

A) it is comparable to the prevailing market interest rate on debt.

B) it is an indication of how much the firm is earning overall.

C) all companies have the same cost of capital.

D) as long as the cost of capital is earned, the common stock value of the firm will be maintained.

2. You bought one of Great White Shark Repellant Co.’s 8 percent coupon bonds one year ago for $780. These bonds make annual payments and mature 7 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 11 percent. If the inflation rate was 3.9 percent over the past year, what was your total real return on investment?

a. 15.92%

b. 15.82%

c. 5.95%

d. 25.03%

e. 16.61%