Country U’s firms struggled to keep their weighted average cost of capital after the recession and financial crisis on 2008 and 2009. There is a chance to make economically unjustified investment if the firm underestimates the cost of capital. The uncertainty in the cost of capital resulted in making short-term cost of capital and long-term cost of capital. Firms began to use short-term cost of capital for short-term opportunities and long-term cost of capital for long-term opportunities. To determine: Why firms cannot use both short-run and long-run weighted average costs of capital.

Question

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Answer 1

Question

Chapter 9.5, Problem 1FOP

Summary Introduction

Case summary:

Country U’s firms struggled to keep their weighted average cost of capital after the recession and financial crisis on 2008 and 2009. There is a chance to make economically unjustified investment if the firm underestimates the cost of capital. The uncertainty in the cost of capital resulted in making short-term cost of capital and long-term cost of capital.

Firms began to use short-term cost of capital for short-term opportunities and long-term cost of capital for long-term opportunities.

To determine: Why firms cannot use both short-run and long-run weighted average costs of capital.

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Answer 2

Question

Chapter 9.5, Problem 1FOP

Summary Introduction

Case summary:

Country U’s firms struggled to keep their weighted average cost of capital after the recession and financial crisis on 2008 and 2009. There is a chance to make economically unjustified investment if the firm underestimates the cost of capital. The uncertainty in the cost of capital resulted in making short-term cost of capital and long-term cost of capital.

Firms began to use short-term cost of capital for short-term opportunities and long-term cost of capital for long-term opportunities.

To determine: Why firms cannot use both short-run and long-run weighted average costs of capital.

Expert Solution & Answer

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Answer 3

Question

Chapter 9.5, Problem 1FOP

Summary Introduction

Case summary:

Country U’s firms struggled to keep their weighted average cost of capital after the recession and financial crisis on 2008 and 2009. There is a chance to make economically unjustified investment if the firm underestimates the cost of capital. The uncertainty in the cost of capital resulted in making short-term cost of capital and long-term cost of capital.

Firms began to use short-term cost of capital for short-term opportunities and long-term cost of capital for long-term opportunities.

To determine: Why firms cannot use both short-run and long-run weighted average costs of capital.

Expert Solution & Answer

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Answer 4

Question

Chapter 9.5, Problem 1FOP

Summary Introduction

Case summary:

Country U’s firms struggled to keep their weighted average cost of capital after the recession and financial crisis on 2008 and 2009. There is a chance to make economically unjustified investment if the firm underestimates the cost of capital. The uncertainty in the cost of capital resulted in making short-term cost of capital and long-term cost of capital.

Firms began to use short-term cost of capital for short-term opportunities and long-term cost of capital for long-term opportunities.

To determine: Why firms cannot use both short-run and long-run weighted average costs of capital.

Expert Solution & Answer

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Answer 5

Chapter 9.5, Problem 1FOP

Summary Introduction

Case summary:

Country U’s firms struggled to keep their weighted average cost of capital after the recession and financial crisis on 2008 and 2009. There is a chance to make economically unjustified investment if the firm underestimates the cost of capital. The uncertainty in the cost of capital resulted in making short-term cost of capital and long-term cost of capital.

Firms began to use short-term cost of capital for short-term opportunities and long-term cost of capital for long-term opportunities.

To determine: Why firms cannot use both short-run and long-run weighted average costs of capital.

Answer 6

Chapter 9.5, Problem 1FOP

Summary Introduction

Case summary:

Country U’s firms struggled to keep their weighted average cost of capital after the recession and financial crisis on 2008 and 2009. There is a chance to make economically unjustified investment if the firm underestimates the cost of capital. The uncertainty in the cost of capital resulted in making short-term cost of capital and long-term cost of capital.

Firms began to use short-term cost of capital for short-term opportunities and long-term cost of capital for long-term opportunities.

To determine: Why firms cannot use both short-run and long-run weighted average costs of capital.

Answer 7

Chapter 9.5, Problem 1FOP

Summary Introduction

Case summary:

Country U’s firms struggled to keep their weighted average cost of capital after the recession and financial crisis on 2008 and 2009. There is a chance to make economically unjustified investment if the firm underestimates the cost of capital. The uncertainty in the cost of capital resulted in making short-term cost of capital and long-term cost of capital.

Firms began to use short-term cost of capital for short-term opportunities and long-term cost of capital for long-term opportunities.

To determine: Why firms cannot use both short-run and long-run weighted average costs of capital.

Answer 8

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Answer 9

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Answer 10

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Answer 11

Ch. 9.1 - Prob. 1FOE Ch. 9.1 - What is the cost of capital?Ch. 9.1 - Prob. 9.2RQ Ch. 9.1 - Prob. 9.3RQ Ch. 9.1 - What are the typical sources of long-term capital...Ch. 9.2 - Prob. 9.5RQ Ch. 9.2 - Prob. 9.6RQ Ch. 9.2 - Prob. 9.7RQ Ch. 9.3 - How would you calculate the cost of preferred...Ch. 9.4 - What premise about share value underlies the...

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Chapter 9 Solutions