2. Factors affecting a firm's weighted cost of capital

The importance of knowing a firms cost of capital

Pacific Book Binding 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

Less risky over time, and its value will increase

Riskier over time, and its value will decrease

Riskier over time, and its value will increase

Which of the following statements is correct?

A company needs to adjust the cost of debt for taxes, because interest payments are tax deductible.

If a firm wants to lower its cost of debt, it can simply issue debt with a lower coupon rate.

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.