1. How do retained earnings differ from other sources of financing?

2. Does the retained earnings figure shown on a firm's balance sheet necessarily have any relationship to the amount of retained earnings the firm can generate in the coming year? Explain.

3. Why is corporate long-term debt riskier than government long-term debt?

4. Why do investors generally consider common stock to be riskier than preferred stock?

5. Should a firm pay cash dividends in a year in which it raises external common equity?

6. Discuss the meaning of an optimal capital budget.

7. Evaluate the statement "Depreciation-generated funds have no explicit cost and therefore should be assigned a zero cost in computing a firm's cost of capital."

8. Describe how to derive the break points in the marginal cost of capital schedule.

9. Discuss the pros and cons of various sources of estimates of future earnings and dividend growth rates for a company.

10. What market risk premium should be used when applying the CAPM to compute the cost of equity capital for a firm if

a. the risk-free rate is the 90-day Treasury bill rate?

b. the risk-free rate is the 20-year government bond rate?

11. What factors determine the required rate of return for any security?

12. What are the similarities and differences in preferred stock and debt as sources of financing for a firm?

13. Why is the marginal cost of capital the relevant concept for evaluating investment projects, rather than a firm's actual, historic cost of capital?