Crowdly

more debt

less debt

None of these options are valid. There is no relationship between the cyclical nature of an industry and optimal capital structure.

A firm in a stable industry should use

a large amount of debt to lower the cost of capital.

preferred stock in place of debt.

a limited amount of debt to lower the cost of capital.

no debt at all.

The use of the optimum capital structure minimizes the cost of capital.

True

100%

False

Most firms are able to use _________% debt in their capital structure without exceeding norms acceptable to creditors and investors.

50-70

60-80

40-60

30-50

A firm that does not earn the cost of capital in the long run will not maximize shareholder wealth.

True

100%

False

Each project should be judged against

the specific means of financing used to support its implementation.

the cost of new common stock equity.

the existing interest rate at that point in time.

None of these options are true.

Why is the cost of debt normally lower than the cost of preferred stock?

Interest on debt is tax deductible.

Preferred stock dividends are tax deductions.

Common stock dividends are not tax-deductible.

Preferred stock dividends must be paid before common stock dividends.

The general rule for using the weighted average cost of capital (WACC) in capital budgeting decisions is to accept all projects with

rates of return equal to or less than the WACC.

rates of return greater than or equal to the WACC.

rates of return less than the WACC.

positive rates of return.

For many firms, the cheapest and most important source of equity capital is in the form of

retained earnings.

common stock.

debt.

preferred stock.

The after-tax cost of debt will almost always be below

the cost of equity.

the weighted average cost of capital.

the before-tax cost of debt.

all of these options are true.