1. Factors affecting a firm's weighted cost of capital THE IMPORTANCE OF KNOWING A FIRM'S COST OF CAPITAL Cost of capital In 2010 the Federal Reserve Board (the Fed) reported that nonfinancial companies in the United States had around s2 trillion in cash and short-term liquid assets. As the U.S. economy was still struggling, consumer spending remained low, and companies resisted in investing in new projects that would create value for their stakeholders. As the economy improves, uncertainty in the markets decreases, and companies will start investing in projects. However, the challenge of analyzing and selecting projects that would generate cash flows and returns and add value to the firm would remain. The scursione in oboseskreis about et otsuit sed debe Used for besiste bescianifestimet e thote sedba Summary Based on your understanding of the concept of cost of capital, which of the following statements are valid? Check all that apply. The required rate of return for long-term debt capital funding is incorporated separately in project analysis, because it is not included in the weighted average cost of capital (WACC). The company's weighted average cost of capital (WACC) incorporates the required rates of return that investors expect as a compensation for the risk. O Companies have free cash flow that is available for distribution, and investors expect to earn a certain required rate of return if it is invested. The weighted average cost of capital (WACC) is considered the overall rate expected to generate required returns for investors, but companies do not use it while discounting project cash flows. Blue Oyster Seafood Company has two divisions: one is very risky, and the other exhibits significantly less risk. The company uses its investors' overall required rate of return to evaluate its investment projects. It is most likely that the firm will become: Less risky over time and its value will decrease O Less risky over time, and its value will increase O Riskier over time, and its value will increase O Riskier over time, and its value will decrease Which of the following statements is correct? O A company needs to adjust the cost of debt for taxes, because interest payments are tax deductible. The cost of raising funds from retained earnings is usually a lot cheaper than the cost of debt financing, because the firm already possesses the funds in retained earnings. O A firm's after-tax cost of preferred stock may be significantly less than its before-tax cost, because issuing preferred stock dividends creates a tax shelter
