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

The statement is true. When calculating the cost of capital and making capital budgeting decisions, it is important for the firm to consider its target capital structure and assume that each dollar of capital is obtained in alignment with that structure. This means that the cost of each component of capital (debt, preferred stock, common equity) must be calculated and weighted according to its proportion in the capital structure.

For Capital Budgeting and Cost of Capital Purposes, the Firm