Capital
Funds and assets a firm uses to operate and invest; debt plus equity make up its capital structure.
Level I tests this two ways. First, plug-and-chug WACC: weight each source by its target (or market-value) proportion, never book value, and use the after-tax cost of debt r_d(1−t) while leaving the cost of preferred and common equity pre-tax. The classic traps are tax-shielding equity and pulling cost of debt from the coupon rate instead of the bond’s yield to maturity (the marginal cost of new debt). Second, conceptual MM questions: watch that adding leverage with taxes also raises the cost of equity (MM II), yet still lowers WACC.
The confusables: don’t conflate cost of capital with return — WACC is the firm’s required return (a hurdle), while a project’s IRR or expected return is what it delivers (see investment, where you accept only when expected return > WACC). And distinguish raising capital (issuance) from pricing it (this term). Memory hook: only debt gets the haircut — the government subsidizes interest, never dividends, so just the debt term carries (1−t).
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