1. Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them, but capital raised by selling new stock or bonds does have a cost.
2. The marginal cost of capital (MCC) is the cost of the last dollar of new capital that the firm raises, and it declines as more and more of a specific type of capital is raised during a given period.
3. Flotation costs associated with issuing new equity cause the cost of external equity to be lower than the cost of retained earnings.
4. A firm going from a lower to a higher tax bracket could increase its use of debt, yet actually wind up with a lower after-tax cost of debt.
5. Firms should use their weighted average cost of capital (WACC) when they are funding their capital projects with a variety of sources. However, when the firm plans on using only debt or only equity to fund a particular project, it should use the after-tax cost of the specific source of capital to evaluate that project.
6. If a firm uses no debt, the uncertainty inherent in projections of future returns can be described as business risk.
7. One of the implications of signaling theory for capital structure decisions is that firms should normally seek to maintain a reserve borrowing capacity.
8. Firms in industries that are cyclical, oriented toward research, or subject to huge liability suits normally will maintain high levels of debt in their capital structure.
9. Generally speaking, companies in Italy and Japan use less debt in their capital structure than companies in the United States or Canada.
10. The dividend irrelevance theory says that as long as a firm pays a dividend, how much it pays does not affect either its cost of capital or its stock price.
11. Firms with a large number of acceptable capital budgeting projects generally have a high dividend payout ratio.