Cost of Capital Estimation Techniques Quiz

WACC is a measure of overall cost of capital, not specifically equity.

Flotation costs encompass expenses related to raising new capital.

Interest expenses on debt are deductible from taxable income.

Coupon rate is the interest rate paid on debt instruments.

WACC considers both equity and debt, providing a blended rate.

Beta quantifies a security's volatility relative to the market.

WACC integrates cost of equity and debt weighted by their proportions in the capital structure.

CAPM focuses on systemic factors like market risk, not firm-specific metrics like earnings per share.

Cost of capital indicates the return expected by providers of capital.

Cost of preferred stock is calculated as preferred dividends divided by par value.

Hurdle rate is the threshold return needed for a project to be viable.

Discount rate assesses the value of future cash flows.

Higher cost of capital reduces the profitability of investments.

Tc accounts for the corporate tax rate in WACC calculations.

Cost of debt is determined by interest rates, not dividend policies.

High WACC indicates expensive capital sourcing for the company.

DDM assumes perpetual and stable dividend growth.

The cost of debt is primarily determined by interest payments, not market price.

MM theorem assumes no market imperfections like taxes or costs.

DDM's assumption of constant dividend growth may not hold.

Retained earnings have an opportunity cost, usually higher than debt.

Marginal cost of capital indicates the expense of obtaining more capital.

CAPM overlooks diversification's impact on risk reduction.

A higher WACC increases the hurdle rate for investments.

CAPM incorporates firm-specific risk in its calculations.