Which of the following statements is CORRECT?
A) The after-tax cost of debt that should be used as the component cost when calculating the WACC is the average after-tax cost of all the firm's outstanding debt.
B) Suppose some of a publicly-traded firm's stockholders are not diversified; they hold only the one firm's stock.In this case, the CAPM approach will result in an estimated cost of equity that is too low in the sense that if it is used in capital budgeting, projects will be accepted that will reduce the firm's intrinsic value.
C) Whether shareholders are already equity holders or are brand-new equity holders, they all have the same required rate of return on stock.
D) The bond-yield-plus-risk-premium approach is the most sophisticated and objective method for estimating a firm's cost of equity capital.
E) The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project, i.e., it is the after-tax cost of debt if debt is to be used to finance the project or the cost of equity if the project will be financed with equity.

Question

Quizplus · Accepted Answer

The Answer of Which of the following statements is CORRECT?
A) The after-tax cost of debt that should be used as the component cost when calculating the WACC is the average after-tax cost of all the firm's outstanding debt.
B) Suppose some of a publicly-traded firm's stockholders are not diversified; they hold only the one firm's stock.In this case, the CAPM approach will result in an estimated cost of equity that is too low in the sense that if it is used in capital budgeting, projects will be accepted that will reduce the firm's intrinsic value.
C) Whether shareholders are already equity holders or are brand-new equity holders, they all have the same required rate of return on stock.
D) The bond-yield-plus-risk-premium approach is the most sophisticated and objective method for estimating a firm's cost of equity capital.
E) The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project, i.e., it is the after-tax cost of debt if debt is to be used to finance the project or the cost of equity if the project will be financed with equity.

Which of the Following Statements Is CORRECT