1. The pre-tax cost of debt for a new issue of debt is determined by

the investor's required rate of return on issued stock.

the coupon rate of existing debt.

the yield to maturity of outstanding bonds.

all of these.

2. Debreu Beverages has an optimal capital structure that is 60% common equity, 30% debt, and 10% preferred stock. Debreu's cost of equity is 10%. Its cost of preferred equity is 5%, and its pretax cost of debt is 6%. If the corporate tax rate is 30%, what is the weighed average cost of capital?

8.76%

7.76%

6.76

5.76