1) When retained earnings are exhausted, the MCC breaks upward. What happens if the firm continues to raise capital after that? Does the MCC remain flat or move further upward? In either case, why?
2) Which is incorrect in regard to a firm's cost of capital?
a) It is the risk adjusted discount rate that is appropriate for all projects under consideration by the firm.
b) It is the average rate for using the firm's funds.
c) It is the opportunity cost of using the firm's funds.
d) It is the minimum rate of return a project must generate to warrant consideration by management.
3) Why should the debt portion of the WACC be adjusted for tax?
a) Because the interest paid on debt is not taxable at the firm level.
b) Because the interest paid on debt is not taxable at the investor level.
c) Because all components of the WACC are not taxable.
d) Because the principle paid on the debt is not taxable at the firm level.
4) The weighted-average cost of capital
a) Blends the returns required by all suppliers of funds.
b) Incorporates the firm's capital structure in its calculation.
c) Is virtually never lower than the cost of debt nor higher than the cost of equity.
d) All of the above
5) Which of the following is not a component used in calculating the cost of capital?
a) The cost of short-term debt
b) The cost of long-term debt
c) The cost of retained earnings
d) The cost of preferred stock
e) The cost of common stock
6) The WACC is used in evaluating newly proposed capital budgeting projects. It should therefore be calculated using capital component costs and a capital structure
a) Based on the capital on the firm's books because that's the capital it already has and will use to support new projects
b) Based on conditions the firm will encounter when raising new capital in the next year because that's the capital it will use to support new projects
c) Based on existing capital on the books because both old and new projects have to be supported
d) Based on existing equity but new debt amounts and costs
7) The cost of capital can be described best as the:
a) Rate a firm pays for the use of invested funds
b) The minimum return required of capital budgeting projects that are about as risky as the firm
c) Either of the above
d) None of the above