d. None of the above. 34. Rip Van Winkle awakens from a short nap and tells us that he read in The Wall Street journal that the appropriate cost of capital a. depends primarily on the source of the funds, rather than the use. b. is the total risk of the firs equity c. depends primarily on the use of the funds, not the source - d. the interest rate on the firm's outstanding long-term bonds 35. mother earth tells us that the cost of debt for a firm: a. can be observed directly even if the firm's equity and then using the SML. b. is estimated by finding the yield on previously issued bonds of similar risk. - c. is the return that the firms creditors demand on new borrowing activities 36. Mother earth reminds us that WACC is the overall return the firm must earn on its existing assets to maintain the value of its stock. All else being the same, a lower corporate tax rate a. Will increase the WACC of a firm with debt and equity in its capital structure. b. will not affect the WACC of a firm with debt in its capital structure. c. Will decrease the WACC of a firm with some debt in its capital structure. - d. will decrease the WACC of a firm with only equity in its capital structure 37. Mother Earth tells us that the stock of the Fun Corporation has a beta of .80. The market risk premium is 9 percent, and the risk-free rate is 6 percent, Today, Fun Corporation paid a dividend of $1.00 per share, and the dividend expected to grow at 8 percent indefinitely. The stock currently sells for $18. She asks us to calculate the cost of equity capital for the Fun Corporation using the Security Market Line approach. As a reminder, the Capital Asset Pricing Model (CAPM) is the equation of the Security Market Line showing the relationship between expected return and beta. Which of the following is our answer a. 7.2 b. 8.1 C. 1.32 - d. 14 38. Based on the information in the previous question Mother Earth also asks us to calculate the cost of equity capital for the Fun Corporation using the Dividend Growth Model approach. Which of the following is our answer? a. 7.2 b. 8.1 C. 13.2 d. 14 - 39. to see if we have been paying attention, mother earth asks us which of the following statements is true a. A primary advantage of using the dividend growth model approach to estimating the cost of equity is its simplicity. a disadvantage of using the dividend growth model approach is that it does not explicitly consider risk - b. a firm that uses its WACC as a cutoff will tend to reject profitable projects with risks less than those of the overall firm