Question: 1. Define the term cost of capital.

2. In 2009, ExxonMobil (XOM) announced its intention to acquire XTO Energy for $41 billion. The acquisition provided ExxonMobil an opportunity to engage in the development of shale and unconventional natural gas resources within the continental United States. This acquisition added to ExxonMobil's existing upstream (exploration and development) activities. In addition to this business segment, ExxonMobil was also engaged in chemicals and downstream operations related to the refining of crude oil into a variety of consumer and industrial products. How do you think the company should approach the determination of its cost of capital for making new capital investment decisions?

2. 1. Why do firms calculate their weighted average cost of capital?

2. In computing the cost of capital, which sources of capital should be considered?

3. How does a firm's tax rate affect its cost of capital? What is the effect of the flotation costs associated with a new security issue on a firm's weighted average cost of capital?

4. a. Distinguish between internal common equity and new common stock.

b. Why is there a cost associated with internal common equity?

c. Describe two approaches that could be used in computing the cost of common equity.

5. What might we expect to see in practice regarding the relative costs of different sources of capital?