(20-25)

1.Which of the following will directly impact the cost of debt?

Capital Structure

Debt Ratio

Coupon Rate

Competition within the industry

2.The ____________ approach to computing a divisional weighted average cost of capital (WACC) requires only that WACCs for "risky" and "relatively safe" divisions be adjusted.

	subjective
	objective
	firmwide
	implicit

3.Which of following is a situation in which you would want to use the CAPM approach for estimating the component cost of equity?

	When you are able to estimate the market risk premium with certainty.
	When you are able to estimate the risk-free rate with certainty.
	When you are able to estimate the firm's beta with certainty.
	When the firm pays a constant dividend.

4.A proxy beta is _________________.

	the average beta of firms that are only engaged in the proposed new line of business
	the industry average beta that is used in lieu of the firm's beta because the firm has not existed long enough to have a beta calculated
	the beta used when the firm has a great deal of business risk
	None of these answers is correct.

5.Which of the following statements is correct?

A decrease in the firm's marginal corporate tax rate will decrease the weighted average cost of capital.

Flotation costs can decrease the weighted average cost of capital.

The cost of debt is based on the cost of all liabilities, including accounts payable and accruals.

None of these statements is correct.

6.A firm uses only debt and equity in its capital structure. The firm's weight of debt is 40%. The firm could issue new bonds at a yield to maturity of 9% and the firm has a tax rate of 30%. If the firm's WACC is 11%, what is the firm's cost of equity?

	15.92%
	14.13%
	15.03%
	15.68%