Why do we use the overall cost of capital for investment decisions even when only one source
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Question:
- 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)?
- In computing the cost of capital, do we use the historical costs of existing debt and equity or the current costs as determined in the market? Why?
- What are the two sources of equity (ownership) capital for the firm?
- How are the weights determined to arrive at the optimal weighted average cost of capital?
- It has often been said that if the company can't earn a rate of return greater than the cost of capital it should not make investments. Explain.
- What effect would inflation have on a company's cost of capital? (Hint: Think about how inflation influences interest rates, stock prices, corporate profits, and growth.)
Related Book For
Foundations of Financial Management
ISBN: 978-1259194078
15th edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
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