7. The relationship between WACC and investors' required rates of return

The required rate of return of an investor is the rate of return that an investor demands to purchase a firm’s stocks or bonds and thus provide funds for capital investment. Therefore, required returns from the investors’ point of view correspond to the required returns or the weighted average cost of capital (WACC) from the firm’s point of view.

Indicate in the following table whether each of the statements about WACC and the required rates of return of investors is true or false.

Statement	True	False
Flotation costs increase the cost of newly issued stock compared to the cost of the firm’s existing, or already outstanding, common stock or retained earnings.
The amount that an investor is willing to pay for a firm’s bonds is inversely related to the firm’s cost of preferred stock.
A firm will lose wealth if it invests in projects based on a WACC that is lower than the investors’ required rate of return.
The difference between the cost of retained earnings and the cost of new common equity is the cost to issue the new common stock.

Answer rating: 100% (QA)

1 The cost of retained earnings is the same as the cost of interna... View the full answer