Chapter 13 Conceptual Questions

A firm's cost of capital should be used as the discount rate for every new project the firm considers

False

An increase in a firm's debt ratio will have no effect on the required rate of return for equity holders

False

The company's cost of capital is the expected rate of return that investors demand from the company's assets and operations

True

What decision should be made on a project with above-average market risk?

Use a higher discount rate than the WACC to reflect the project's risk and accept if NPV is positive at this higher discount rate

Capital structure decisions refer to the

blend of equity and debt used by the firm

Implicit Cost

required increase in return from equity

Explicit cost

the explicit cost of debt is the rate of interest that bondholders demand

A firms WACC is

is a benchmark discount rate that may be adjusted for the riskiness of each project

To calculate the present value of a business, the firm's free cash flows should be discounted at the firm's

weighted average cost of captial