The importance of knowing a firm's cost of capital Cost of capital Summary In 2010 the Federal Reserve Board (the Fed) reported that nonfinancial companies in the United States had around $2 trillion in cash and short-term liquid assets. As the U.S economy was still struggling, consumer spending remained low, and resisted in investing in new projects that would create value for their stakeholders. Based on your understanding of the concept of cost of capital, which of the following statements are valid? Check all that apply companies Investors care about the incremental value addition that new projects are making; they are least concerned with the discount rates that the company uses. A company's estimate of cost of capital impacts its application in the analysis of new investments that, consequently, affects the value of the firm and shareholders' wealth As the economy improves, uncertainty in the markets decreases, and companies will start investing in projects. However, the challenge of analyzing and selecting projects that would generate cash flows and returns and add value to the firm would remain Companies incorporate the required rate of return in the cost of capital to compensate investors for the components' risks Companies always use the weighted average cost of capital (WACC) as the discount rate to analyze the financial viability of projects. The assumptions in the analvsis about 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 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? O 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. O If a firm wants to lower its cost of debt, it can simply issue debt with a lower coupon rate when all other factors are held constant, a higher tax rate will lower a firm's weighted average cost of capital only if the firm uses debt financing