PROBLEM #1 CHAPTER 8 1. Is each of the following statements true or false? Expla

Question

PROBLEM #1 CHAPTER 8

1. Is each of the following statements true or false? Explain your answers briefly.

a. Using the same risk-adjusted discount rate to discount all future cash flow ignores the fact that the more distant cash flows are often riskier than cash flow occurring sooner.

b. The cost of capital, or WACC, is not the correct discount rate to use for all projects undertaken by a firm.

c. If you can borrow all of the money you need for a project at 6%, the cost of capital for this project is 6%.

d. The best way to estimate the cost of debt capital for a firm is to divide the interest-bearing debt on the balance sheet.

e. One reliable estimate of a privately held firm

Explanation / Answer

1.True(Each risk measure is unique in how it measures risk,becuase risk free rate may alter and the corresponding rate change)

2.False(A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.)

3.True(Cost of capital includes the cost of debt and the cost of equity,here its debt)

4.False(The cost of newly issued bonds is the best rate to use if possible when calculating the cost of debt.)

5.True(Once an unlevered beta estimate is made, the cost of equity can be estimated using the capital asset pricing model(CAPM))

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