1. If the corporate tax rate increases, what is the effect on the after tax cost of debt, the cost of equity and the WACC? Assume everything else remains the same.

a. The after tax cost of debt decreases, the cost of equity stays the same and the WACC stays the same.

b. All three stay the same.

c. The after tax cost of debt decreases, the cost of equity stays the same and the WACC decreases.

d. The after tax cost of debt decreases, the cost of equity decreases and the WACC decreases.

2. A firm is calculating its WACC. Which of the following interest rates should the company use for the calculation of the cost of debt rd?

a. The company's marginal interest rate.

b. An average of the interest rates it pays on its current debt.

c. The highest interest rate it pays on its current loans.

d. The historic interest rate of its debt.

3. A company is looking to invest in a new plant in California. The plant will be financed with bonds that have a 6% coupon rate and will yield 7%. The company's tax rate is 40% and it's Weighted Average Cost of Capital is 9%. It expects to earn a return on the investment in the plan of 8%. In its decision to invest or not to invest, which cost of capital % listed above should the company use to compare to the return it expects to earn on its capital of 8%?

a. The Weighted Average Cost of Capital of 9%.

b. The bond coupon rate of 6%.

c. The after tax bond yield of 4.2%.

d. The bond yield of 7%

4. Which of the following is not considered a capital component in calculating the weighted average cost of capital (WACC)?

a. Preferred Stock

b. Common Stock

c. Retained Earnings

d. Notes Payable

e. Accounts payable

5. Which of the following items is an internal source of financing?

a. Preferred Stock

b. Accounts Payable

c. Retained Earnings

d. Common Stock

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