Question
Based on your understanding of the concept of cost of capital, which of the following statements are valid? Choose all that apply. a. Companies have
Based on your understanding of the concept of cost of capital, which of the following statements are valid? Choose all that apply.
a. 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.
b. The company's weighted average cost of capital (WACC) incorporates the required rates of return that investors expect as a compensation for the risk.
c. The required rate of return for long-term debt capital funding is incorporated seperately in project analysis, because it is not included in the weighted average cost of capital (WACC).
d. 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.
Which of the following statements is correct?
a. A firm's WACC should decrease if its tax rate increases, but the yield to maturity of its noncallable bonds remains the same and all other factors are held constant.
b. If a firm wants to lower its cost to debt, it can simply issue debt with a lower couponrate.
c. The market value of a firm's debt and equity will continuously change throughout the day, but the book value of debt and equity tends to stay more stable over time. Conseuently, the firm, should use the book-value weight to define its optimal capital structure.
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