High Adventure is considering a new project that is similar in risk to the firm's current operations. The firm maintains a debt-equity ratio of .55 and retains all profits to fund the firm's rapid growth. How should the firm determine its cost of equity? Select one: a. By averaging the costs based on the dividend growth model and the capital asset pricing model. b. By adding the market risk premium to the after tax cost of debt. c. By using the dividend growth model. d. By using the capital asset pricing model. e. By multiplying the market risk premium by 1.55
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.
High Adventure is considering a new project that is similar in risk to the firm's current operations. The
firm maintains a debt-equity ratio of .55 and retains all profits to fund the firm's rapid growth. How
should the firm determine its
Select one:
a. By averaging the costs based on the dividend growth model and the
b. By adding the market risk premium to the after tax cost of debt.
c. By using the dividend growth model.
d. By using the capital asset pricing model.
e. By multiplying the market risk premium by 1.55
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