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Cost of capital

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Which of the following statements is most correct?

a. In the weighted average cost of capital calculation, we must adjust the cost of preferred stock for the tax exclusion of 70 percent of dividend income.

b. We ideally would like to use historical measures of the component costs from prior financings in estimating the appropriate weighted average cost of capital.

c. The cost of common stock (rs) will increase if the market risk premium and risk-free rate decline by a substantial amount.

d. Statements b and c are correct.

e. None of the statements above is correct.

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Solution Preview

a. In the weighted average cost of capital calculation, we must adjust the cost of preferred stock for the tax exclusion of 70 percent of dividend income.

We do not adjust since this is applicable to be investor and not to the ...

Solution Summary

The solution explains the correct statement among the given statements relating to cost of capital

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Market Rates and Cost of Capital

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What does a company's cost of capital represent and how is it calculated? How do market rates and the company's perceived market risk impact its cost of capital, and how does the company's debt to equity mix impact this cost of capital? Using the information provided, develop a spreadsheet to calculate weighted average cost (WAC) and marginal weighted average cost (MCC) of capital for Strident Marks?

You have developed the following table concerning the cost of capital sources for Strident Marks:
The future investment opportunities and the corresponding Internal Rate of Return (IRR) follow. As a result of operating its business operations profitably, Strident Marks has $1,000,000 to invest. Considering Strident Marks' weighted average cost of capital and MCC, rank the investment opportunities and indicate which ones would be accepted, which (if any) would be rejected and why.

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