Please write down your choice in the blank before the question. Two points each and 10 points in total.

__b___ Which of the following is NOT a capital component, i.e., a source of investor-supplied capital?

a-Notes payable.

b-Account payable.

c-Long-term debt.

d-Preferred stock.

_____ Which of the following statements is NOT CORRECT?

a-The cost of capital used in capital budgeting should reflect the average cost of the various types of capital a firm uses to finance the projects.

b-The cost of equity is a market-determined variable in the sense that its shareholders required return.

c-The after-tax cost of debt, which is lower than then before-tax cost, is used as the component cost of debt for purposes of developing the firms WACC.

d-The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of preferred dividends received by a corporation may be excluded from the receiving companys taxable income.

_____ Which of the following statements is CORRECT?

a-Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them.

b-The firms cost of external equity raised by issuing new stock is the same as the required rate of return on the firms retained earnings.

c-A firms cost of equity is highly dependent upon the risk level of the firm.

d-A firms cost of equity is inversely related to changes in the firms tax rate.

__d___ The discount rate assigned to an individual project should be based on the

a-Firm's weighted average cost of capital.

b-Average of the firm's overall cost of capital for the past five years.

c-Current risk level of the overall firm.

d-Risks associated with the use of the funds required by the project.

_____ Which of the following would most likely cause many firms cost of capital to rise?

a- A decrease in the market interest rates.

b-The credit crisis is over.

c-Investors become less risk averse.

d-An increase in corporate income tax.