Unit 3: The Weighted Average Cost of Capital

The WACC consists of the costs of __________.

Preferred stock, debt, and equity Common stock, debt, and preferred stock Debt, equity, and preferred stock

The WACC can also be thought of as __________.

the amount it costs the firm to access capital the minimum rate of return a firm would need for a project to be worthy of investment a hurdle rate for projects the rate at which the firm borrows

If your recommendations to Apex included using debt to finance this project, __________.

there would be an increase in the interest that Apex will pay the firm's interest expenses would increase the WACC would be reduced a reduction in the average cost of capital would occur

A lower WACC will lead to:

A reduction in the level of project risk An increased spread on profit from projects A lower hurdle rate for projects Lower borrowing costs

The calculation of the WACC includes which of the following?

Tax rate Market value of equity Market value of debt Market value of preferred stock

Options for decision criteria would include which of the following?

The average of the firms' cost to access capital WACC

An increase in risk will __________.

be reflected in a higher Beta raise the weighted average cost of capital cause the WACC to increase decrease a firm's ability to access capital

If all other factors in the WACC calculation stay constant, increasing the amount of current debt will __________.

decrease the WACC cause the weighted cost of capital to be reduced

Calculating the weighted average cost of capital includes __________.

risk, as defined by Beta proportions of capital types each category of capital