Why do we use the overall cost of capital for investment decisions even when only one source of capital will be used (e.g., debt)? (LO11-1)

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Answer 1

Textbook Question

Chapter 11, Problem 1DQ

Why do we use the overall cost of capital for investment decisions even when only one source of capital will be used (e.g., debt)? (LO11-1)

Expert Solution & Answer

Summary Introduction

To explain: The reason for using the overall cost of capital in order to make the decisions related to investments even though only one capital source is used.

Introduction:

Cost of Capital:

It refers to the rate of return paid by a company to its shareholders on investments and is helpful in the evaluation of investment opportunities.

Answer to Problem 1DQ

Financing through low-cost debt is the first priority for any firm as the use of debt might be riskier to the firm and can make financing costlier. Thus, every project should be measured keeping the total cost of funds aside to make effective investment decisions.

Explanation of Solution

An investment to be financed through low-cost debt must be acceptable by the firm right in the beginning but its use could increase the overall risk for the firm, thus increasing the cost of all the types of financing. Thus, every project should be estimated thoroughly keeping the total cost of the funds aside.

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Students have asked these similar questions

Why do we use the overall cost of capital for investment decisions even when only one source of capital will be used (e.g., debt)?

1. What is opportunity cost and why is it an important concept in the capital budgeting process? The opportunity cost concept applies to almost every financial decision we make as individuals. Can you give an example from your own experience? 2. What is capital rationing from the perspective of capital budgeting? 3. Give an example of a strength and a weakness of the accounting rate of return approach.

From a financial perspective, how are projects chosen when capital rationing exists? Do you think capital rationing is fair or not?

Answer 2

Textbook Question

Chapter 11, Problem 1DQ

Why do we use the overall cost of capital for investment decisions even when only one source of capital will be used (e.g., debt)? (LO11-1)

Expert Solution & Answer

Summary Introduction

To explain: The reason for using the overall cost of capital in order to make the decisions related to investments even though only one capital source is used.

Introduction:

Cost of Capital:

It refers to the rate of return paid by a company to its shareholders on investments and is helpful in the evaluation of investment opportunities.

Answer to Problem 1DQ

Financing through low-cost debt is the first priority for any firm as the use of debt might be riskier to the firm and can make financing costlier. Thus, every project should be measured keeping the total cost of funds aside to make effective investment decisions.

Explanation of Solution

An investment to be financed through low-cost debt must be acceptable by the firm right in the beginning but its use could increase the overall risk for the firm, thus increasing the cost of all the types of financing. Thus, every project should be estimated thoroughly keeping the total cost of the funds aside.

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Answer 3

Textbook Question

Chapter 11, Problem 1DQ

Why do we use the overall cost of capital for investment decisions even when only one source of capital will be used (e.g., debt)? (LO11-1)

Expert Solution & Answer

Summary Introduction

To explain: The reason for using the overall cost of capital in order to make the decisions related to investments even though only one capital source is used.

Introduction:

Cost of Capital:

It refers to the rate of return paid by a company to its shareholders on investments and is helpful in the evaluation of investment opportunities.

Answer to Problem 1DQ

Financing through low-cost debt is the first priority for any firm as the use of debt might be riskier to the firm and can make financing costlier. Thus, every project should be measured keeping the total cost of funds aside to make effective investment decisions.

Explanation of Solution

An investment to be financed through low-cost debt must be acceptable by the firm right in the beginning but its use could increase the overall risk for the firm, thus increasing the cost of all the types of financing. Thus, every project should be estimated thoroughly keeping the total cost of the funds aside.

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Answer 4

Textbook Question

Chapter 11, Problem 1DQ

Why do we use the overall cost of capital for investment decisions even when only one source of capital will be used (e.g., debt)? (LO11-1)

Expert Solution & Answer

Summary Introduction

To explain: The reason for using the overall cost of capital in order to make the decisions related to investments even though only one capital source is used.

Introduction:

Cost of Capital:

It refers to the rate of return paid by a company to its shareholders on investments and is helpful in the evaluation of investment opportunities.

Answer to Problem 1DQ

Financing through low-cost debt is the first priority for any firm as the use of debt might be riskier to the firm and can make financing costlier. Thus, every project should be measured keeping the total cost of funds aside to make effective investment decisions.

Explanation of Solution

An investment to be financed through low-cost debt must be acceptable by the firm right in the beginning but its use could increase the overall risk for the firm, thus increasing the cost of all the types of financing. Thus, every project should be estimated thoroughly keeping the total cost of the funds aside.

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

Expert Solution & Answer

Summary Introduction

To explain: The reason for using the overall cost of capital in order to make the decisions related to investments even though only one capital source is used.

Introduction:

Cost of Capital:

It refers to the rate of return paid by a company to its shareholders on investments and is helpful in the evaluation of investment opportunities.

Answer to Problem 1DQ

Financing through low-cost debt is the first priority for any firm as the use of debt might be riskier to the firm and can make financing costlier. Thus, every project should be measured keeping the total cost of funds aside to make effective investment decisions.

Explanation of Solution

An investment to be financed through low-cost debt must be acceptable by the firm right in the beginning but its use could increase the overall risk for the firm, thus increasing the cost of all the types of financing. Thus, every project should be estimated thoroughly keeping the total cost of the funds aside.

Answer 8

Expert Solution & Answer

Summary Introduction

To explain: The reason for using the overall cost of capital in order to make the decisions related to investments even though only one capital source is used.

Introduction:

Cost of Capital:

It refers to the rate of return paid by a company to its shareholders on investments and is helpful in the evaluation of investment opportunities.

Answer to Problem 1DQ

Financing through low-cost debt is the first priority for any firm as the use of debt might be riskier to the firm and can make financing costlier. Thus, every project should be measured keeping the total cost of funds aside to make effective investment decisions.

Explanation of Solution

An investment to be financed through low-cost debt must be acceptable by the firm right in the beginning but its use could increase the overall risk for the firm, thus increasing the cost of all the types of financing. Thus, every project should be estimated thoroughly keeping the total cost of the funds aside.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Summary Introduction

To explain: The reason for using the overall cost of capital in order to make the decisions related to investments even though only one capital source is used.

Introduction:

Cost of Capital:

It refers to the rate of return paid by a company to its shareholders on investments and is helpful in the evaluation of investment opportunities.

Answer 12

Answer to Problem 1DQ

Financing through low-cost debt is the first priority for any firm as the use of debt might be riskier to the firm and can make financing costlier. Thus, every project should be measured keeping the total cost of funds aside to make effective investment decisions.

Answer 13

Explanation of Solution

An investment to be financed through low-cost debt must be acceptable by the firm right in the beginning but its use could increase the overall risk for the firm, thus increasing the cost of all the types of financing. Thus, every project should be estimated thoroughly keeping the total cost of the funds aside.

Answer 14

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Why do we use the overall cost of capital for investment decisions even when only one source of capital will be used (e.g., debt)? (LO11-1)

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