FM Unit 4 DB: Cost of Capital
write at least 500 words that respond to the following questions with
your thoughts, ideas, and comments. This will be the foundation for
future discussions by your classmates. Be substantive and clear, and use
examples to reinforce your ideas.
In the weighted average cost of capital formula, the after-tax cost of debt is used instead of the before-tax cost of debt. However, no such adjustment is made to the cost of equity. Are you surprised by this different tax handling of debt versus equity? Why or why not?
If a corporation borrowed all of the money for its project at the risk-free rate, does that mean that the project’s cost of capital is the risk-free rate?
When calculating the weighted average cost of capital, would it matter more if book values instead of market values were used for equity instead of debt? Please explain.
Be sure to document your posts with in-text citations, credible sources, and properly listed references.
Solution Preview
The Weighted Average Cost of Capital (WACC) can be simply described as the value of the firm’s capital which is arrived at through a calculation which distinguishes each proportion of the cost of capital. Considering that the chief financing sources of a firm can be classified into two where there are the debt and equity both of which are incorporated in the formula by adding up both the significant weights of these capital sources.
(562 words)