The chapters in this document are displayed in reversed order, with the last chapter appearing
first. This change ensures all chapters are included in the test bank.
Chapter 18 Complete Chapters ✅
Capital Structure and the Cost of Capital
TRUE-FALSE QUESTIONS
1. The firm’s capital structure is the mix of debt and equity used to finance its assets.
Answer: T
Difficulty Level: Easy
Subject Heading: Why Choose a Capital Structure?
L.O. 18.1
2. Firm value is calculated by adding expected cash flow to the firm’s cost of capital under
each capital structure.
Answer: F
Difficulty Level: Medium
Subject Heading: Why Choose a Capital Structure?
L.O. 18.1
3. A nonoptimal capital structure may lead to higher financing costs.
Answer: T
Difficulty Level: Medium
Subject Heading: Why Choose a Capital Structure?
L.O. 18.1
4. A nonoptimal capital structure may lead the firm to reject some capital budgeting
projects that could have increased shareholder wealth with an optimal financing mix.
Answer: T
Difficulty Level: Medium
Subject Heading: Why Choose a Capital Structure?
L.O. 18.1
5. The firm’s optimum debt/equity mix minimizes the firm’s cost of capital, which in turn will
help the firm to maximize shareholder wealth.
Answer: T
Difficulty Level: Medium
Subject Heading: Why Choose a Capital Structure?
L.O. 18.1
6. The ratio of long-term debt to GDP for non-financial U.S. corporations declined
drastically during the late 1990s.
Answer: F
Difficulty Level: Medium
Subject Heading: Trends in Corporate Use of Debt
L.O. 18.1
1
,7. The ratio of debt to stock market equity has generally been lowest for the largest of U.S.
firms.
Answer: T
Difficulty Level: Medium
Subject Heading: Trends in Corporate Use of Debt
L.O. 18.1
8. Repurchasing common stock decreases a firm’s debt to equity ratio.
Answer: F
Difficulty Level: Medium
Subject Heading: Trends in Corporate Use of Debt
L.O. 18.1
9. A lower weighted average cost of capital gives lower project NPVs.
Answer: F
Difficulty Level: Easy
Subject Heading: Why Choose a Capital Structure?
L.O. 18.1
10. The firm’s optimum debt/equity mix maximizes the firm’s cost of capital, which in turn will
help the firm to maximize shareholder wealth.
Answer: F
Difficulty Level: Easy
Subject Heading: Why Choose a Capital Structure?
L.O. 18.2
11. The minimum acceptable rate of return for a project is the return that generates sufficient
cash flow to pay investors their expected return.
Answer: T
Difficulty Level: Medium
Subject Heading: Required Rate of Return and The Cost of Capital
L.O. 18.2
12. The required return, the cost of capital, and the discount rate are actually three
distinctively different concepts.
Answer: F
Difficulty Level: Medium
Subject Heading: Required Rate of Return and The Cost of Capital
L.O. 18.2
2
,13. The minimum required rate of return is a weighted average of the firm’s cost of various
sources of capital.
Answer: T
Difficulty Level: Easy
Subject Heading: Required Rate of Return and The Cost of Capital
L.O. 18.2
14. Minimum cash flow ⁄ Investment = Maximum rate of return.
Answer: F
Difficulty Level: Easy
Subject Heading: Required Rate of Return and The Cost of Capital
L.O. 18.2
15. The weighted average cost of capital is used so project acceptance is not subject to how
it is to be financed.
Answer: T
Difficulty Level: Easy
Subject Heading: Required Rate of Return and The Cost of Capital
L.O. 18.2
16. The cost of debt represents the minimum acceptable rate of return to a firm on a project
of average risk.
Answer: F
Difficulty Level: Medium
Subject Heading: Cost of Debt
L.O. 18.3
17. There is no opportunity cost associated with retained earnings.
Answer: F
Difficulty Level: Easy
Subject Heading: Cost of Common Equity
L.O. 18.3
18. The cost of capital should be estimated from the historical cost of raising debt and equity
capital.
Answer: F
Difficulty Level: Medium
Subject Heading: Cost of Capital
L.O. 18.3
3
, 19. The firm’s unadjusted cost of debt financing equals the yield to maturity on new debt
issues.
Answer: T
Difficulty Level: Medium
Subject Heading: Cost of Debt
L.O. 18.3
20. Firms have three sources of common equity, retained earnings, new stock issues, and
new bond issues.
Answer: F
Difficulty Level: Medium
Subject Heading: Cost of Common Equity
L.O. 18.3
21. Retained earnings are not directly related to net income.
Answer: F
Difficulty Level: Medium
Subject Heading: Cost of Common Equity
L.O. 18.3
22. Retained earnings represent cost-free financing to the firm.
Answer: F
Difficulty Level: Medium
Subject Heading: Cost of Common Equity
L.O. 18.3
23. Issuance costs are costs of issuing stock; includes accounting, legal, and printing costs
of offering shares to the public, as well as the commission or fees earned by the
investment bankers.
Answer: F
Difficulty Level: Medium
Subject Heading: Cost of New Common Stock
L.O. 18.3
24. Similar to the net present value method, there is a formula to determine the proportions
of debt and equity a firm should use to finance its assets.
Answer: F
Difficulty Level: Easy
Subject Heading: Difficulty of Making Capital Structure Decisions
L.O. 18.4
4
first. This change ensures all chapters are included in the test bank.
Chapter 18 Complete Chapters ✅
Capital Structure and the Cost of Capital
TRUE-FALSE QUESTIONS
1. The firm’s capital structure is the mix of debt and equity used to finance its assets.
Answer: T
Difficulty Level: Easy
Subject Heading: Why Choose a Capital Structure?
L.O. 18.1
2. Firm value is calculated by adding expected cash flow to the firm’s cost of capital under
each capital structure.
Answer: F
Difficulty Level: Medium
Subject Heading: Why Choose a Capital Structure?
L.O. 18.1
3. A nonoptimal capital structure may lead to higher financing costs.
Answer: T
Difficulty Level: Medium
Subject Heading: Why Choose a Capital Structure?
L.O. 18.1
4. A nonoptimal capital structure may lead the firm to reject some capital budgeting
projects that could have increased shareholder wealth with an optimal financing mix.
Answer: T
Difficulty Level: Medium
Subject Heading: Why Choose a Capital Structure?
L.O. 18.1
5. The firm’s optimum debt/equity mix minimizes the firm’s cost of capital, which in turn will
help the firm to maximize shareholder wealth.
Answer: T
Difficulty Level: Medium
Subject Heading: Why Choose a Capital Structure?
L.O. 18.1
6. The ratio of long-term debt to GDP for non-financial U.S. corporations declined
drastically during the late 1990s.
Answer: F
Difficulty Level: Medium
Subject Heading: Trends in Corporate Use of Debt
L.O. 18.1
1
,7. The ratio of debt to stock market equity has generally been lowest for the largest of U.S.
firms.
Answer: T
Difficulty Level: Medium
Subject Heading: Trends in Corporate Use of Debt
L.O. 18.1
8. Repurchasing common stock decreases a firm’s debt to equity ratio.
Answer: F
Difficulty Level: Medium
Subject Heading: Trends in Corporate Use of Debt
L.O. 18.1
9. A lower weighted average cost of capital gives lower project NPVs.
Answer: F
Difficulty Level: Easy
Subject Heading: Why Choose a Capital Structure?
L.O. 18.1
10. The firm’s optimum debt/equity mix maximizes the firm’s cost of capital, which in turn will
help the firm to maximize shareholder wealth.
Answer: F
Difficulty Level: Easy
Subject Heading: Why Choose a Capital Structure?
L.O. 18.2
11. The minimum acceptable rate of return for a project is the return that generates sufficient
cash flow to pay investors their expected return.
Answer: T
Difficulty Level: Medium
Subject Heading: Required Rate of Return and The Cost of Capital
L.O. 18.2
12. The required return, the cost of capital, and the discount rate are actually three
distinctively different concepts.
Answer: F
Difficulty Level: Medium
Subject Heading: Required Rate of Return and The Cost of Capital
L.O. 18.2
2
,13. The minimum required rate of return is a weighted average of the firm’s cost of various
sources of capital.
Answer: T
Difficulty Level: Easy
Subject Heading: Required Rate of Return and The Cost of Capital
L.O. 18.2
14. Minimum cash flow ⁄ Investment = Maximum rate of return.
Answer: F
Difficulty Level: Easy
Subject Heading: Required Rate of Return and The Cost of Capital
L.O. 18.2
15. The weighted average cost of capital is used so project acceptance is not subject to how
it is to be financed.
Answer: T
Difficulty Level: Easy
Subject Heading: Required Rate of Return and The Cost of Capital
L.O. 18.2
16. The cost of debt represents the minimum acceptable rate of return to a firm on a project
of average risk.
Answer: F
Difficulty Level: Medium
Subject Heading: Cost of Debt
L.O. 18.3
17. There is no opportunity cost associated with retained earnings.
Answer: F
Difficulty Level: Easy
Subject Heading: Cost of Common Equity
L.O. 18.3
18. The cost of capital should be estimated from the historical cost of raising debt and equity
capital.
Answer: F
Difficulty Level: Medium
Subject Heading: Cost of Capital
L.O. 18.3
3
, 19. The firm’s unadjusted cost of debt financing equals the yield to maturity on new debt
issues.
Answer: T
Difficulty Level: Medium
Subject Heading: Cost of Debt
L.O. 18.3
20. Firms have three sources of common equity, retained earnings, new stock issues, and
new bond issues.
Answer: F
Difficulty Level: Medium
Subject Heading: Cost of Common Equity
L.O. 18.3
21. Retained earnings are not directly related to net income.
Answer: F
Difficulty Level: Medium
Subject Heading: Cost of Common Equity
L.O. 18.3
22. Retained earnings represent cost-free financing to the firm.
Answer: F
Difficulty Level: Medium
Subject Heading: Cost of Common Equity
L.O. 18.3
23. Issuance costs are costs of issuing stock; includes accounting, legal, and printing costs
of offering shares to the public, as well as the commission or fees earned by the
investment bankers.
Answer: F
Difficulty Level: Medium
Subject Heading: Cost of New Common Stock
L.O. 18.3
24. Similar to the net present value method, there is a formula to determine the proportions
of debt and equity a firm should use to finance its assets.
Answer: F
Difficulty Level: Easy
Subject Heading: Difficulty of Making Capital Structure Decisions
L.O. 18.4
4
