Mark The Following True or False 1) The Firm\'s cost of capital may also be refe

Question

Mark The Following True or False
1) The Firm's cost of capital may also be referred to as the firm's opportunity cost of capital. 2) Corporations have two costs of common equity, one for retained earnings and one if the company issues new stock. 3) A security with a reasonably stable price will have a lower required rate of return than a security with an unstable price. 4) A short term T-bill's rate of return should be used in the CAPM formula to determine the cost of equity capital regardless of the length of the project under construction. Mark The Following True or False
1) The Firm's cost of capital may also be referred to as the firm's opportunity cost of capital. 2) Corporations have two costs of common equity, one for retained earnings and one if the company issues new stock. 3) A security with a reasonably stable price will have a lower required rate of return than a security with an unstable price. 4) A short term T-bill's rate of return should be used in the CAPM formula to determine the cost of equity capital regardless of the length of the project under construction.
1) The Firm's cost of capital may also be referred to as the firm's opportunity cost of capital. 2) Corporations have two costs of common equity, one for retained earnings and one if the company issues new stock. 3) A security with a reasonably stable price will have a lower required rate of return than a security with an unstable price. 4) A short term T-bill's rate of return should be used in the CAPM formula to determine the cost of equity capital regardless of the length of the project under construction.

Explanation / Answer

1

Correct Answer:

False

Explanation:

Cost of capital for a firm means required rate of return on the investment / funds. But, opportunity cost of capital is the required rate of return on the best investment opportunity forgone. Thus, cost of capital cannot be referred as opportunity cost of capital.

2.

Correct Answer:

False

Explanation:

Since, in both cases shareholders are providing funds to the company to finance the investment of projects, cost of equity will remain same in both cases as mentioned in the question.

3.

Correct Answer:

True

Explanation:

A security with high volatility in price will require shareholders to demand for higher required rate of return and vice versa.

4.

Correct Answer:

True

Explanation:

Short term Treasury bills returns are used as risk free return in computation of cost of equity under CAPM model. Thus, it can be used.

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