Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Which of the following statements is CORRECT? Suppose some of a publicly-traded firm's stockholders are not diversified, they hold only the one firm's stock In

image text in transcribed
Which of the following statements is CORRECT? Suppose some of a publicly-traded firm's stockholders are not diversified, they hold only the one firm's stock In this case, the CAPM approach will result in an estimated cost of equity that is too low in the sense that if it is used in capital budgeting, projects will be accepted that will reduce the firm's intrinsic value. The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project, i e., it is the after tax cost of debt if debt is to be used to finance the project or the cost of equity if the project will be financed with equity. The after-tax cost of debt that should be used as the component cost when calculating the WACC is the average after-tax cost of all the firm's outstanding debt. The bond-yield-plus-risk-premium approach is the most sophisticated and objective method for estimating a firm's cost of equity capital. The cost of equity is generally harder to measure than the cost of debt because there is no stated, contractual cost number on which to base the cost of equity

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

Step: 3

blur-text-image

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

Dividend Growth Investing Machine

Authors: Andrew P.C.

1st Edition

1521728461, 978-1521728468

More Books

Students also viewed these Finance questions

Question

What do you think the true value of social CRM is?

Answered: 1 week ago

Question

6. Discuss the ethics of using CCTV cameras for marketing research.

Answered: 1 week ago