For capital budgeting and cost of capital purposes, the firm should assume that each dollar of capital is obtained in accordance with its target capital structure, which for many firms means partly as debt, partly as preferred stock, and partly common equity.

Question

Quizplus · Accepted Answer

This statement is true. When analyzing capital budgeting and cost of capital, it is important for a firm to consider its target capital structure, which typically includes a mix of debt, preferred stock, and common equity. Assuming that each dollar of capital is obtained in accordance with this target structure allows for a more accurate analysis of the cost of each component and the overall cost of capital for the firm.

For Capital Budgeting and Cost of Capital Purposes, the Firm