A CFO will underestimate his firm's cost of capital if he

Question

Quizplus · Accepted Answer

Underestimating transaction costs and ignoring excess free cash flow can lead to an underestimation of the firm's cost of capital. Overestimating personal tax rates would have the opposite effect, which is an overestimation of the firm's cost of capital. Transaction costs and excess free cash flow both affect the cost of capital. If a CFO underestimates transaction costs and ignores excess free cash flow, they will underestimate the firm's cost of capital. Overestimating the personal tax rates faced by the firm's investors would not have a direct impact on the cost of capital.

A CFO Will Underestimate His Firm's Cost of Capital If