QUESTION 11 Which of the following statements is correct? O a. The WACC as used in capital budgeting is an estimate of a company's before-tax cost of capital. O b. There is an opportunity cost associated with using retained earnings, hence they are not "free." c. The WACC, as used in capital budgeting, is an estimate of the cost of all the capital a company has raised to acquire its assets. O d. The percentage flotation costs associated with issuing new common equity are typically smaller than the flotation costs for new debt. QUESTION 12 Which of the following statements is correct? a. No cost should be assigned to retained earnings because the firm does not have to pay anything to raise themthey are generated as cash flows by operating assets that were raised in the past; hence, they are "free." ob. If a firm has enough retained earnings to fund its capital budget for the coming year, then there is no need to estimate either a cost of equity or a WACC. A cost should be assigned to retained earnings due to the opportunity cost principle, which refers to the fact that the firm's stockholders could themselves earn a return on earnings if they were paid out rather than . retained and reinvested. Suppose a firm has been losing money and thus is not paying taxes, and this situation is expected to persist into the foreseeable future. In this case, the firm's before-tax and after-tax costs of debt will both be equal to Od the interest rate on the firm's currently outstanding debt, provided that debt was issued during the past 5 years. QUESTION 13 Which statement about WACC is true? a. Flotation costs associated with issuing new common stock normally reduce the WACC. b. WACC calculations should be based on the before-tax costs of all the individual capital components. OC. A change in a company's target capital structure cannot affect its WACC. O d. If a company's tax rate increases, then, all else equal, its WACC will decline. QUESTION 14 Suppose a firm uses a single source of capital to fund a project. Which of the following statements is correct? a. Only the cost of that source should be used to evaluate the project. ob. Book values of the funding source should be used in calculating WACC. O c. This project should still be evaluated using the firm's WACC. d. The average cost of all previously raised capital should be used for evaluation