Posted: July 20th, 2016

Explain how the use of book value weights might render the calculation of a firm s WACC unreliable?

T 1. Why is the firm s weighted average cost of capital (WACC) considered a ?hurdle rate??

T 2. What is the distinction between the firm s weighted average cost of capital((WACC) and its weighted marginal cost of capital (WMCC)?

T 3. Explain how the use of book value weights might render the calculation of a firm s WACC unreliable.

T 4. Briefly explain the following statement: Models that attempt to estimate the firm s cost of retained earnings are simultaneously measuring the opportunity cost borne by equity investors in the firm (i.e., those that own stock in the firm).

T 5. Regarding the firm s WACC estimate, list two real world problems encountered in estimating the firm s cost of equity capital.

T 6. In terms of using the accept/reject criteria in capital budgeting decisions, what might be the outcome of using the firm s WACC instead of its risk adjusted WACC (assuming a risk adjusted WACC is appropriate)?

T 7. Under typical circumstances the cost of debt is lower than the cost of equity. List two reason why.