Would generate cash flows and returns and add value to the firm would remain. The assumptions in the analysis about cost of equity and debt-overall and for projects-have a significant impact on the type and the value of investments that a company makes. According to the Association of Finance Professionals' report, published in 2011 on current trends in estimating and applying the cost of capital, companies use a discount rate that is usually above or below 1% of the company's true rate. Using this information and certain inputs from the Fed, Michael Jacobs and Anil Shivdasani estimated that a 1% drop in the cost of capital leads U.S. companies to increase their investment by about $150 million over three years. Based on your understanding of the concept of cost of capital, which of the following statements are valid? Check all that apply. Companies incorporate the required rate of return in the cost of capital to compensate investors for the components' risks. 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. Companies always use the weighted average cost of capital (WACC) as the discount rate to analyze the financial viability of projects. Income Corp. is considering investing in a project in which the risk is greater than the firm's current risk based on any method for assessing risk. Which of the following should management do when evaluating this project? To take the higher risk level into account, they will need to use a discount rate that is greater than the cost of capital to evaluate the project. To take the higher risk level into account, they will need to increase the NPV of the project. To take the higher risk level into account, they will need to increase the IRR of the project. They should always reject the project, because it will increase the firm's risk level. Which of the following statements is correct? 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 define its optimal capital structure. When all other factors are held constant, a higher tax rate will lower a firm's WACC only if the firm uses debt financing. A firm's after-tax cost of preferred stock may be significantly less than its before-tax cost, because issuing preferred stock dividends creates a tax shelter