1.a. Discuss the following statement in light of our diagram of the corporation: The cost of capital depends primarily on the use of the funds, not the source.

1.b. What implications does the above statement have for calculating the cost of capital for the acquisition of one company by another, and for assigning divisions of a company a cost of capital for use in capital budgeting decisions.

1.c. A company is about to construct a new 10 million dollar factory, for which it sold 10 million dollars of bonds yielding 9.5%. The cost of capital for this project is therefore 9.5%. Do you agree or disagree with this statement, and why?

1.d. In practice the cost of capital is difficult to estimate, particularly for small, privately owned businesses. Fully explain how you would estimate the cost of debt, the cost of equity and the weighted average cost of capital for such a company.