37. For many firms, the cheapest and most important source of equity capital is in the form A. debt. B common stock. C. preferred stock. D. retained earnings. 38. The optimal capital structure for firms in cyclical industries should contain than firms in stable industries. A. more debt B. less debt C. an equal amount of debt D. None of these options are valid. There is no relationship between the cyclical nature of an industry and optimal capital structure 39. Although debt financing is usually the cheapest component of capital, it cannot be used in excess because A. interest rates may change. B. the firm's stock price will increase and raise the cost of equity financing. C. the financial risk of the firm may increase and thus drive up the cost of all sources of financing. D. underwriting costs may change. 40. Marginal cost of capital A. recognizes that cost of capital does not stay constant as more funds are raised. B. usually provides the same capital budgeting choices as the use of weighted average cost of capital. C. can be defined as the cost of capital when no retained earnings are available for expansion. D. None of these options apply. 41. Oak Enterprises has a beta of 1.2, the market return is 8%, and the T-bill rate is 4%. Its tax rate is 40%. What is its expected required return of common equity? 31. The cost of equity capital in the form of new common stock will be higher than the cost of retain earnings because of A. the existence of taxes. B. the existence of flotation costs. C. investors' unwillingness to purchase additional shares of common stock. D. the existence of financial leverage. _32. Why is the cost of debt normally lower than the cost of preferred stock? A. Preferred stock dividends are tax deductions. B. Interest on debt is tax deductible. C. Preferred stock dividends must be paid before common stock dividends. D. Common stock dividends are not tax-deductible. 33. In computing the cost of common equity, if the dividend (D1) goes downward and market price (PO) goes up, required rate of return (Ke) will A. go up. B. go down C. stay the same. D. slowly increase. 34. Within the capital asset pricing model A. the risk-free rate is usually higher than the return in the market. B. the higher the beta, the lower the required rate of return. C. beta measures the volatility of an individual stock relative to a stock market index. D. dividends are considered in the calculations. 35. Expected cash dividends are $3.00, the dividend yield is 4%, flotation costs are 4% of price, and the growth rate is 3%. Compute the approximate cost of new common stock