The cost of capital is: the required rate of return for new projects that have risk that is similar to that of the overall firm. the rate of return a firm earns on its investments to satisfy the required rate of return for the firm's investors. the opportunity cost of using funds on projects. all of the above.

The cost of capital is: the required rate of return for new projects that have risk that is similar to that of the overall firm. the rate of return a firm earns on its investments to satisfy the required rate of return for the firm's investors. the opportunity cost of using funds on projects. all of the above.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 13QTD

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The cost of capital is: the required rate of return for new projects that have risk that is similar to that of the overall firm. the rate of return a firm earns on its investments to satisfy the required rate of return for the firm’s investors. the opportunity cost of using funds on projects. all of the above.
With everything else held constant, which of the following events should increase the internal rate of return of a capital budgeting project? A. An increase in the cost of the asset. B. A decrease in the firm’s cost of capital. C. A decrease in the cost of operating the asset. D. A decrease in tax benefits.
Select all that are true with respect to the Cost of Capital. Group of answer choices The cost of capital is the discount rate to use when evaluating investment opportunities There is one cost of capital for every firm, and that one rate should be used for evaluating all investment opportunities The cost of capital for an asset is driven by an asset's riskiness The cost of capital is driven by how we raise funds to pay for an investment opportunity The cost of capital for a project is driven by the systematic risk of that project When estimating the cost of capital for a project, it is the total risk of that project that matters
Explain what the weighted average cost of capital for a firm is and why is it often used as a discount rate to evaluate capital projects.
Before making capital budgeting decisions, finance professionals often generate, review, analyze, select, and implement long-term investment proposals that meet firm-specific criteria and are consistent with the firm’s strategic goals. Companies often use several methods to evaluate the project’s cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. For most firms, the reinvestment rate assumption in the NPV is more realistic than the assumption in the IRR. The discounted payback period improves on the regular payback period by accounting for the time value of money. Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them to grasp.
Before making capital budgeting decisions, finance professionals often generate, review, analyze, select, and implement long-term investment proposals that meet firm-specific criteria and are consistent with the firm’s strategic goals. Companies often use several methods to evaluate the project’s cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR. The discounted payback period improves on the regular payback period by accounting for the time value of money. Because the MIRR and NPV use the same reinvestment rate assumption, they always lead to the same accept/reject decision for mutually exclusive projects. True or False: Sophisticated firms use only the NPV method in…
Before making capital budgeting decisions, finance professionals often generate, review, analyze, select, and implement long-term investment proposals that meet firm-specific criteria and are consistent with the firm’s strategic goals. Companies often use several methods to evaluate the project’s cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. For most firms, the reinvestment rate assumption in the NPV is more realistic than the assumption in the IRR. Because the MIRR and NPV use the same reinvestment rate assumption, they always lead to the same accept/reject decision for mutually exclusive projects. The discounted payback period improves on the regular payback period by accounting for the time value of money. is the single best method to use when making capital budgeting…
What are two crucial presuppositions we make when we choose to use the present cost of capital of a firm to evaluate the profitability of projects in which we invest? Be thorough.
According to the M&M propositions WITH and WITHOUT taxes, should a financial manager spend time analysing a firm’s capital structure? What is the optimal capital structure with and without tax? Discuss.
The decision process Before making capital budgeting decisions, finance professionals often generate, review, analyze, select, and implement long-term investment proposals that meet firm-specific criteria and are consistent with the firm’s strategic goals. Companies often use several methods to evaluate the project’s cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR. The discounted payback period improves on the regular payback period by accounting for the time value of money. Because the MIRR and NPV use the same reinvestment rate assumption, they always lead to the same accept/reject decision for mutually exclusive projects. True or False: Sophisticated firms use only…
The relationship between WACC and investors' required rates of return The required rate of return of an investor is the rate of return that an investor demands to purchase a firm’s stocks or bonds and thus provide funds for capital investment. Therefore, required returns from the investors’ point of view correspond to the required returns or the weighted average cost of capital (WACC) from the firm’s point of view. Indicate in the following table whether each of the statements about WACC and the required rates of return of investors is true or false. Statement True False Flotation costs increase the cost of newly issued stock compared to the cost of the firm’s existing, or already outstanding, common stock or retained earnings. The firm’s cost of debt is what an investor is willing to pay for the firm’s stock before considering flotation costs. The amount that an investor is willing to pay for a firm’s bonds is inversely related to the…
Should the weighted average cost of capital be applied uniformly across the firm to all projects . While the Weighted Average Cost of Capital reflects the risk perceived by in investors the “real risk” is:?