Which of the following causes a firm's cost of capital (WACC)to differ from an investor's required rate of return on the company's common stock?

Question

Quizplus · Accepted Answer

A firm's cost of capital (WACC) includes the cost of debt, cost of equity, and the weight of each type of financing. The cost of equity is based on investors' required rate of return, which reflects their perception of the company's risk. However, when a firm issues new securities, it incurs flotation costs, which increase the cost of equity and cause the WACC to differ from the investor's required rate of return. Therefore, choice B is the correct answer. The risk-free rate of interest and the market risk premium can affect the investor's required rate of return, but they are not factors that cause a difference between the WACC and the required return.

Which of the Following Causes a Firm's Cost of Capital