1) From a WACC calculation prepared for you by a consultant, you find that their estimation of the after tax cost of debt is 6%. Given a tax rate of 40% and a WACC of 15%, what must have been the cost of debt before adjusting for taxes?

a) 10%

b) 6%

c) 2.4%

d) 15%

e) 3.6%

2) Which of the following is incorrect, when describing "EBIT"?

"EBIT is the result of starting with revenues, and deducting..."

a) Fixed Costs

b) Variable Costs

c) Depreciation

d) Taxes

e) All of these are correct

3) Why is issuing common stock more expensive than using retained earnings?

a) It is not. Both sources of capital are the same, and represent owner's equity.

b) Because new common stock is riskier than retained earnings, and therefore more expensive.

c) Actually, since retained earnings are real money, while stock is only shares of the company, retained using earnings is more expensive.

d) Because of flotation, i.e.: the added cost of selling the new shares of stock.

e) Because stock gains pay higher taxes than retained earnings.