I. Fill in the blank using a number of terms listed below (@1 point).

After-tax, Average, Before-tax, Bird-in-the-hand theory, Bond-yield-plus-risk-premium, Book, CAPM, Clientele effect, Common equity, DCF, Debt, Dividend- irrelevance- theory, DRIP, Ex-dividend date, Information content of- dividends, Interest, Long-term, Market, Market price, Not-tax-deductible, Optimal-distribution, Par value, Positive, Preferred stock, Residual distribution model, Short-term, Stock dividend, Stock split, Target capital structure, Tax-deductible, Tax preference theory, Treasury stock, Undervalued

1. The cost of capital used in capital budgeting should reflect the average cost of the various sources of____________ funds a firm uses to acquire assets.

2. The component costs of capital are __________ values in the sense that they are based on investors' required returns.

3. The _________ cost of debt, which is lower than the __________ cost, is used as the component cost of debt for purposes of developing the firm's WACC. 4. The cost of perpetual preferred stock is found as the preferred's annual dividend divided by the _____________of the preferred stock. No adjustment is needed for taxes because preferred dividends, unlike ______________on debt, is __________________by the issuing firm. 5. For capital budgeting and cost of capital purposes, the firm should assume that each dollar of capital is obtained in accordance with its____________________, which for many firms means partly as ____________, partly as__________________, and partly ____________________. 6. The cost of debt, rd, is normally __less or higher__ than rs, so rd(1 - T) will normally be much __less or higher__than rs. Therefore, as long as the firm is not completely debt financed, the weighted average cost of capital (WACC) will normally be __lower or greater__ than rd(1- T).(Circle one)

7. The text identifies three methods for estimating the cost of common stock from reinvested earnings (not newly issued stock): __________ method, ___________method, and _______________________ method. Since we cannot be sure that the estimate obtained with any of these methods is correct, it is often appropriate to use all three methods, then consider all three estimates, and end up using a judgmental estimate when calculating the WACC, such as _______________ rate of them.

8. The __________________ _ policy is one that strikes a balance between dividend yield and capital gains so that the firms stock price is maximized.

9. The _ ___________________ holds that dividend policy has no effect on either the price of a firms stock or its cost of capital. The principal proponents of this view are Merton Miller and Franco Modigliani (MM).

10. The ____________________ assumes that investors value a dollar of dividends more highly than a dollar of expected capital gains. The __________________ proposes that investors prefer capital gains over dividends, because capital gains taxes can be deferred into the future, but taxes on dividends must be paid as the dividends are received.