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Chapter 11 - Cost of Capital Chapter 11 Cost of Capital True / False Questions 1. It is standard practice to evaluate investment decisions using the cost of the specific financing method involved. True False 2. The calculation of the cost of capital depends upon historical costs of funds. True False 3. The cost of capital for each source of funds is dependent on current market conditions and expected rates of return. True False 4. In determining the cost of debt, yields and prices of outstanding bonds are used. True False 5. The cost of debt is equal to the current bond yield on bonds of similar risk class and adjusted for the corporate tax rate. True False 6. The amount of debt capital used by a corporation is not related to the availability of equity funds from retained earnings and new common stock. True False 7. A firm's cost of preferred stock is equal to the preferred dividend divided by the net price after flotation costs. True False 11-1 Chapter 11 - Cost of Capital 8. A firm's cost of preferred stock is equal to the preferred dividend divided by market price plus the dividend growth rate (K p = D/P o + g). True False 9. The cost of new common stock is greater than the cost of outstanding common stock. True False 10. In determining the cost of preferred stock, the earnings on outstanding preferred stock may be used as a proxy. True False 11. The out-of-pocket cost of common stock is a good approximation of the cost of common stock equity. True False 12. The discount rate that equates a future stream of expected dividends to the current price is a good approximation of the cost of common stock. True False 13. K e represents an expected return to stockholders as well as a cost to the firm. True False 14. The cost of retained earnings is equal to the required rate of return on a firm's outstanding common stock. True False 11-2 Chapter 11 - Cost of Capital 15. Retained earnings represent an internal source of funds that is raised without the payment of interest, or cost to the firm's stockholders. True False 16. The only difference in the cost of retained earnings (K e ) and the cost of new common stock (K n ) is the flotation cost on new common stock. True False 17. Regardless of the particular source of funds utilized for a project, the required rate of return, or discount rate, will be the weighted average cost of capital. True False 18. The use of common stock equity in the weighted average cost of capital is always (K e ) and not (K n ), the cost of new common stock. True False 19. The use of the optimum capital structure minimizes the cost of capital. True False 20. All firms within particular industries have similar optimum capital structures. ... View Full Document

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