Which of the following is NOT a component of the cost of capital?
Cost of debt
Cost of equity
Cost of goods sold
Cost of preferred stock
2 answered
#2
What is the formula for Weighted Average Cost of Capital (WACC)?
WACC = (Cost of Debt + Cost of Equity) / 2
WACC = (Weight of Debt × Cost of Debt) + (Weight of Equity × Cost of Equity)
WACC = Cost of Debt + Cost of Equity
WACC = Cost of Equity - Cost of Debt
3 answered
#3
Which capital structure theory suggests that firms prefer a mix of debt and equity to minimize the weighted average cost of capital and maximize value for shareholders?
Modigliani-Miller theorem
Trade-off theory
Pecking order theory
Market timing theory
3 answered
#4
Which of the following statements is true regarding the cost of debt?
The cost of debt is inversely related to the company's credit rating.
The cost of debt is independent of the interest rates prevailing in the market.
The cost of debt is typically higher for short-term debt than for long-term debt.
The cost of debt is not considered in the calculation of Weighted Average Cost of Capital (WACC).
3 answered
#5
What is the relationship between the cost of debt and the company's credit rating?
There is no relationship between the cost of debt and credit rating.
As the credit rating improves, the cost of debt decreases.
As the credit rating improves, the cost of debt increases.
The cost of debt is independent of the credit rating.
1 answered
#6
What is the primary drawback of using only equity financing for a company?
It leads to high financial leverage.
It increases the risk of bankruptcy.
It dilutes ownership and control.
It results in higher interest expenses.
2 answered
#7
Under the Modigliani-Miller theorem with taxes, what happens to the cost of equity as the level of debt increases?
It decreases due to the tax shield effect.
It increases due to higher financial risk.
It remains constant regardless of the level of debt.
It fluctuates but cannot be determined accurately.
1 answered
#8
What is the key assumption of the Modigliani-Miller theorem regarding capital structure?