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 The amount that an investor is willing to pay for a firm's stock is inversely related to the firm's cost of common equity before flotation costs. 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. The cost of retained earnings is the same as the cost of internal (common) equity.
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 The amount that an investor is willing to pay for a firm's stock is inversely related to the firm's cost of common equity before flotation costs. 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. The cost of retained earnings is the same as the cost of internal (common) equity.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text: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
The amount that an investor is willing to pay for a firm's stock is inversely related to the firm's cost of common equity before
flotation costs.
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.
The cost of retained earnings is the same as the cost of internal (common) equity.
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