Find Course Hero Browse Find study resources Ask Study Resources v Textbook Solutions Expert Tutors Finance Knowledge Test (10 questions) Exit Test 1. Which of the following are acceptable criteria for determining the weights in the weighted average cost of capital? O Market value of the capital structure and historical costs of financing O Market value of the capital structure and the target mix of debt and equity Using the after-tax cost of debt and the market value of the capital structure Using the book value of the capital structure and the prior level of debt and equity 2. When a company increases its degree of financial leverage, the equity beta of the company falls the systematic risk of the company falls the unsystematic risk of the company faills the standard deviation of returns on the equity af the company rises 3. Calculate the degree of financial leverage for a firm with EBIT of $6,000,000, fixed cost of $3,000,000, interest expense of $1,000
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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