Cost of Capital for Investment Decisions
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Why would a financial manager use the overall cost of capital for investment decisions when the specific decision under consideration may be funded by only one source of capital, (e.g., debt or equity)?
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The solution examines the cost of capital for investment decisions. Why a financial manager would use the overall cost of capital for investment decisions when the specific decision under considerations may be funded by only one course of capital is determined.
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A firm's overall cost of capital is an average of the costs of the various types of funds it uses (Brigham & Houston, 2007). Consider a company that uses debt with a 10% cost, no preferred stock, and common equity whose cost is 13.4%, which is the return that stockholders require on the stock. Now assume that that ...
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