The relationship between WACC and investors' required rates of returnThe required rate of return of an investor is the rate of return that an investor demands to purchase a firm’s stocks or bonds and thus provide funds for capital investment. Therefore, required returns from the investors’ point of view correspond to the required returns or the weighted average cost of capital (WACC) from the firm’s point of view.Indicate in the following table whether each of the statements about WACC and the required rates of return of investors is true or false.StatementTrueFalseFlotation costs increase the cost of newly issued stock compared to the cost of the firm’s existing, or already outstanding, common stock or retained earnings. The firm’s cost of debt is what an investor is willing to pay for the firm’s stock before considering flotation costs. The amount that an investor is willing to pay for a firm’s bonds is inversely related to the firm’s cost of debt without considering the cost of issuing the bonds. A firm’s cost of capital is determined by the investors who purchase the firm’s stocks and bonds.

WACC is the weighted average cost of capital. It is minimum return company should achieve to accept…

Answered: The relationship between WACC and…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The relationship between WACC and investors' required rates of return

The required rate of return of an investor is the rate of return that an investor demands to purchase a firm’s stocks or bonds and thus provide funds for capital investment. Therefore, required returns from the investors’ point of view correspond to the required returns or the weighted average cost of capital (WACC) from the firm’s point of view.

Indicate in the following table whether each of the statements about WACC and the required rates of return of investors is true or false.

Statement	True	False
Flotation costs increase the cost of newly issued stock compared to the cost of the firm’s existing, or already outstanding, common stock or retained earnings.
The firm’s cost of debt is what an investor is willing to pay for the firm’s stock before considering flotation costs.
The amount that an investor is willing to pay for a firm’s bonds is inversely related to the firm’s cost of debt without considering the cost of issuing the bonds.
A firm’s cost of capital is determined by the investors who purchase the firm’s stocks and bonds.

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