c. then SML approach to estimating the cost of equity has two advantages; it explicitly adjusts for risk and it is applicable to companies other than those with steady dividend growth d. all of the above e. only a and c 40. on the Gingerbread Board Tinkerbelle writes the following equation first in words followed by the same equation written in symbols: Words: the weighted average cost of capital(WACC) equals [(debt divided by assets )X{(cost of debt)X(1-tax rate)}] + {equity divided by asset} X(Cost of equity) symbols WACC= [(Debt/asset)x(Cost of debt)]x (1-tax rate)]+{(equity/asset)x(cost of equity)} Mother earth tells us that the target debt equity ratio for the creativity inc. is 25%, the cost of debt is 8%, the cost of equity is 15% and the tax rate is 20%. she asks us to calculate the Weighted AVerage Cost of Capital. which of the following is our answer? a. 5.7 b. 9.3 C. 11.5 d. 13.3 - CH13 41. Mother Earth asks Mr. Red and Mr. Green to review Leverage and capital structure. Mr. Red and Mr. Green ask us to comment on Statement1 and 2. Statement 1: the value of the firm is maximized when the WACC is minimized Statement 2: financial leverage acts to magnify gains and losses to shareholders. a. both are false b. 1 false 2 is true c. 1 true 2 is false d. both true - 42. Mr. Red tells us that The Static Theory of capital structure states that firms borrow up to the point where the tax benefits from an extra dollar of debt are exactly equal to the cost that comes from the increased probability of financial distress. The explicit and implicit costs associated with corporate default are the of the firm. a. financial distress costs - b. default beta coefficient costs c. flotation costs d. none of the above 43. Mr green reminds us that if we ignore taxes, financial distress costs, and other iperfections, we find the there is no optimal capital structure. The value of the firm is independent of its capital structure. What is the name of this theory? a. the capital asset pricing model b. M&M proposition 1. ~ c. the law of one price d. M&M proposition