7. The relationship between WACC and investors' required rates of return

The required rate of return of an investor is the rate of return that an investor demands to purchase a firms stocks or bonds and thus provide funds for capital investment. Therefore, required returns from the investors point of view correspond to the required returns or the weighted average cost of capital (WACC) from the firms point of view.

Indicate in the following table whether each of the statements about WACC and the required rates of return of investors is true or false.

Statement	True	False
Flotation costs increase the cost of newly issued stock compared to the cost of the firms existing, or already outstanding, common stock or retained earnings.
The amount that an investor is willing to pay for a firms bonds is inversely related to the firms cost of preferred stock.
A firm will lose wealth if it invests in projects based on a WACC that is lower than the investors required rate of return.
The difference between the cost of retained earnings and the cost of new common equity is the cost to issue the new common stock.

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