Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Which of the following statements is correct? a) The bond-yield-plus-risk-premium approach to estimating the cost of common equity involves adding a risk premium to the

Which of the following statements is correct? a) The bond-yield-plus-risk-premium approach to estimating the cost of common equity involves adding a risk premium to the interest rate on the company's own long term bonds. The size of the risk premium for bonds with different ratings is published daily in the Wall Street journal or is available online. b) The WACC is calculated using a before-tax cost for debt that is equal to the interest rate that must be paid on new debt, along with the after-tax costs for common stock and for preferred stock if it is used. c) An increase in the risk-free rate is likely to reduce the marginal costs of both debt and equity. d) The relevant WACC can change depending on the amount of funds a firm raises during a given year. moreover, the WACC at each level of funds raised is a weighted average of the marginal costs of each capital component, with weights based on the firm's target capital structure. e) Beta measures market risk, which is generally the most relevant risk measure for a publicly-owned firm that seeks to maximize its intrinsic value. however, this is not true unless all of the firm's stockholders are well diversified.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Modeling An Introductory Guide To Excel And VBA Applications In Finance

Authors: Joachim Häcker, Dietmar Ernst

1st Edition

1137426578, 978-1137426574

More Books

Students also viewed these Finance questions