Asked by Melissa Johnson on May 07, 2024
Verified
Which of the following is NOT correct?
A) The cost of equity is the return that equity investors require on their investment in the firm.
B) The cost of equity can be found by either the dividend growth approach or the SML approach.
C) The cost of debt is the return that lenders require on the firm's debt.
D) If the firm has preferred stock in its capital structure, the cost of preferred stock should be included in the cost of capital.
E) Book value capital structure weights should be used to calculate the WACC rather than market value weights.
Cost of Equity
The rate of return that a company is required to pay out to its equity investors, reflecting the compensation for the risk they undertake.
SML Approach
Security Market Line (SML) approach is a graphical representation in the Capital Asset Pricing Model (CAPM) that shows the expected return of an asset or portfolio at various levels of systemic risk.
WACC
Weighted Average Cost of Capital; a calculation of a firm's cost of capital in which each category of capital is proportionally weighted.
- Comprehend the constituents and calculation process for a corporation's comprehensive cost of capital.
- Identify the limitations and applicabilities of different models to estimate the cost of capital.
Verified Answer
Learning Objectives
- Comprehend the constituents and calculation process for a corporation's comprehensive cost of capital.
- Identify the limitations and applicabilities of different models to estimate the cost of capital.
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