Reference no: EM133123805

1. The component costs of capital are market-determined variables in the sense that they are based on investors' required returns.

a. True
b. False

2. The before-tax cost of debt, which is lower than the after-tax cost, is used as the component cost of debt for purposes of developing the firm's WACC.

a. True
b. False

3.The cost of debt is equal to one minus the marginal tax rate multiplied by the interest rate on new debt.

True or false?

4.The cost of preferred stock to a firm must be adjusted to an after-tax figure because 50% of dividends received by a corporation may be excluded from the receiving corporation's taxable income.

a. True
b. False

5.For capital budgeting and cost of capital purposes, the firm should always consider retained earnings as the first source of capital (i.e., use these funds first) because retained earnings have no cost to the firm.

a. True
b. False

6.For capital budgeting and cost of capital purposes, the firm should assume that each dollar of capital is obtained in accordance with its target capital structure, which for many firms means partly as debt, partly as preferred stock, and partly common equity.

a. True
b. False