Capital Structure decisions

1. The cost of capital for a project depends primarily on the:

a. firm's overall source of funds

b. source of the funds used for the specific project

c. current tax rate

d. use of the funds

e. firms historical rates of return

2. A firm's weighted average cost of capital:

a. decreases when the firm's tax rate decreases

b. is another terms for the firm's return on equity

c. varies inversely with the firm's pretax cost of debt

d. is the required return on the existing assets of the firm

e. is the required return for each of the firm's proposed projects

3. All else constant, which of the following will increase the aftertax cost of debt for a firm?

I.  increase in the yield to maturity of the firm's outstanding debt 

II. decrease in the yield to maturity of the firm's outstanding debt

III. increase in the firm's tax rate

IV. decrease in the firm's tax rate

a. I only

b. I and III only

c. I and IV only

d. II and III only

e. II and IV only

4. All else constant, an increase in a firm's cost of debt:

a. Could be caused by an increase in the firm's tax rate

b. Will result in an increase in the firm's cost of capital

c. Will lower the firm's weighted average cost of capital

d. Will lower the firm's cost of equity

e. Will increase the firm's capital structure weight of debt

5. Which one of the following statements is correct concerning capital structure weights?

a. capital structure weights are constant over time

b. a new bond issue will not affect the weight of the firm's preferred stock

c. an increase in the debt-equity ratio will increase the weight of the common stock

d. the repurchase of preferred stock will not affect the weight of the debt

e. the issuance of additional shares of common stock will decrease the weight of the preferred stock

6. All else constant, the weighted average cost of capital for a firm will decrease if:

a. a firm's bonds start selling at a premium rather at a discount

b. the market risk premium increases

c. the firm replaces some of its debt with preferred stock

d. corporate taxes are eliminated

e. the dividend yield on the common stock increases