Summarydecline

Based on your understanding of the concept of cost of capital, which of the following statements are valid? Check all that apply.

Preferred stock is not taken into account when considering the costs related to investor$-$supplied capital.

Companies often finance their new projects with capital that comes from retained eamings. This also constitutes investor$-$supplied capital.

Short$-$term debt such as accounts payable or short$-$term loans are not considered capital components.

Companies are financed by several sources of investor$-$supplied capital, which are called capital components.

Happy Lion Manufacturing Inc, 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 increase

Riskier over time, and its value will increase

Riskier over time, and its value will decrease

Less risky over time, and its value will decrease

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 or debt, it can simply issue debt with a lower coupon rate.

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. Consequently, the firm should use the book$-$value weight to deline its optimal capital structure.