American Outlook Inc. is issuing bonds to obtain the funding necessary to acquir

Question

American Outlook Inc. is issuing bonds to obtain the funding necessary to acquire a major competitor. Review of the balance sheets indicates that American Outlook has also issued preferred and common stock in the past. Which component cost(s) should American Outlook use in evaluating the financial cost of acquiring the new firm?
A. The weighted average component cost of common stock, preferred stock, and debt.
B. The price the firm paid for its assets divided by their market value.
C. Shareholders' equity.
D. The cost of the new debt issue alone.

Explanation / Answer

: Correct answer: A How a company raises capital and how they budget or invest it are considered independently. The financing department is responsible for keeping costs low and using a balance of funding sources. In the short term, a company may overemphasize the most recently issued capital, but in the long run, the firm will ascribe to target weights for each capital type. The investment decision should be made assuming a weighted average cost of capital including each of the different sources of capital and long-run target weights.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.