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Multiple Choice
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1

A firm's cost of capital is the:
A)cost of borrowing money
B)cost of issuing stock
C)cost of bonds
D)overall cost of financing to the firm
2

The cost of debt financing is generally __________ the cost of preferred or common equity financing.
A)less than
B)more than
C)equal to
D)not enough information to tell
3

The cost of preferred stock is usually more than the cost of debt because of:
A)low dividends
B)tax deductibility of interest payments on debt
C)high stock price
D)none of the above
4

The cost of issuing new stock is called:
A)the cost of equity
B)flotation costs
C)marginal cost of capital
D)none of the above
5

The cost of retained earnings does not consider _________ in the equation.
A)flotation costs
B)the dividend in the next time period
C)the value of the common equity
D)the growth rate of dividends
6

The most expensive source of financing for a firm is:
A)debt
B)preferred stock
C)retained earnings
D)new common stock
7

The cost of capital at the retained earnings breakpoint is the:
A)weighted average cost of capital
B)marginal cost of capital
C)cost of new stock
D)none of the above
8

The cost of each component of a firm's capital structure multiplied by its weight in the capital structure is called the:
A)marginal cost of capital
B)cost of debt
C)weighted average cost of capital
D)none of the above
9

When establishing their optimal capital structure, firms should strive to:
A)minimize the weighted average cost of capital
B)minimize the amount of debt financing used
C)maximize the marginal cost of capital
D)none of the above
10

The overall cost of financing for the firm is called the:
A)weighted average cost of capital
B)cost of preferred stock
C)retained earnings breakpoint
D)none of the above





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