Corporate Finance - Cost of Capital Analysis Quiz

Cost of Capital is the average expense a company incurs to finance its assets through debt and equity.

Cost of Debt excludes dividend payments as it's concerned with interest on borrowings.

Various methods like CAPM, Dividend Growth Model, and Earnings Multiplier Model are utilized to estimate the cost of equity.

More debt raises WACC due to higher cost of borrowing and risk to equity holders.

Greater risk demands higher returns, consequently raising the cost of capital.

Credit rating influences the cost of debt as it reflects the company's creditworthiness.

WACC is computed by blending the costs of equity and debt in proportion to their weights in the company's capital structure.

Various factors such as market risk, beta, and dividend policy can influence a company's cost of equity.

CAPM is a model used to evaluate the expected return on equity securities based on their risk.

The cost of debt is calculated without regard to the company's stock price.

Cost of capital analysis aids in identifying the mix of financing that minimizes the firm's overall cost of capital.

Market risk premium directly impacts expected returns on equity, thus influencing the cost of equity.

Floatation Costs pertain to expenses incurred during the issuance of new securities.

Modigliani-Miller theorem asserts that, under specific assumptions, capital structure decisions do not affect firm value.

Marginal Cost of Capital signifies the expense incurred in acquiring additional funding at a particular time.

Leverage denotes the extent to which a company relies on borrowed funds relative to equity.

Cost of retained earnings is computed to evaluate the opportunity cost associated with using internal funds for investment.