Comment on each of the following statements: a) Equity cost of a company with debt is higher than that of a company without debt due to risk of bankruptcy. b) Only risks associated with corporate bonds are interest rate and reinvestment risk. c) In Modigliani-Miller model (from 1963) cost of capital depends positively on cost of debt. d) Weighted average cost of capital (WACC) can always be used to value projects or companies. e) All projects with positive NPV should be accepted and those with negative NPV should be rejected. f) Greater the growth opportunities, higher the level of indebtedness of companies. g) More tangible assets the firm has, the higher the level of indebtedness.
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Comment on each of the following statements:
a) Equity cost of a company with debt is higher than that of a company without debt due to risk of bankruptcy.
b) Only risks associated with corporate bonds are interest rate and reinvestment risk.
c) In Modigliani-Miller model (from 1963) cost of capital depends positively on cost of debt.
d) Weighted average cost of capital (WACC) can always be used to value projects or companies.
e) All projects with positive NPV should be accepted and those with negative NPV should be rejected.
f) Greater the growth opportunities, higher the level of indebtedness of companies.
g) More tangible assets the firm has, the higher the level of indebtedness.
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