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Bolero Plc produces industrial equipment. The company's current financing mix is as follows: Source of capital Equity Proportion Loans 7 1 % 2 9 %
Bolero Plc produces industrial equipment. The company's current financing mix is as follows:
Source of capital
Equity
Proportion
Loans
The cost of equity is estimated at while the aftertax cost of borrowing is lower at
The cost of borrowing is lower than that of equity because:
A debt financing attracts tax benefits relative to equity financing
B shareholders are more riskaverse than banks
C it is simply a random event
D banks have worse information about the company than other parties
The company's Weighted Average Cost of Capital WACC is round to two decimal places
What is the main assumption that accompanies the use of WA
x
You answered:
A WACC cannot be used in investment appraisal
B new investments will have different WACC
C the funding mix will remain the same
D the cost of each source of finance does not change
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