4. A firms target capital structure should do which of the following? A. Maximize earnings per share B. Minimize the cost of debt C. Obtain the highest possible bond rating D. Minimize the cost of equity E. Minimize the weighted average cost of capital

5. A firm recapitalizes by issuing debt and buying back stock. All else remaining unchanged, what is the most likely to happen? A. The ROA increases B. The ROA remains unchanged C. The basic earnings power would decline D. The basic earnings power would increase E. The ROE would increase

6. (This question has three distinct parts) CU has the following capital structure: Debt 25% Preferred stock 15% Common equity 60% Net income is expected to be $34,285.72 this year. Dividend payout is 30%, federal tax rate is 40%, and investors expect dividends to grow at a constant rate of 9%. CU paid a dividend of $3.60 per share last year and CU currently trades at $54/share on the NYSE. Capital can be obtained in the following ways: *issue a new preferred stock with a dividend of $11.00/sh that can be sold the public at $95/share. *debt can be sold at an interest rate of 12%. A. Determine the cost of each capital component, B. Calculate the weighted average cost of capital (aka the WACC) C. Given the following investment opportunities that are average risk projects which one should CU accept and why: Project Cost at t=0 Rate of Return % A $10000 17.4% B $20000 16 C $10000 14.2 D $20000 13.7 E $10000 12.0