Why should financial decision makers obtain a good estimate of a firm’s cost of capital? What are the consequences of using a discount rate that is higher or lower than a firm’s true required return?
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In a few sentences, answer the following question as completely as you can.
- Why should financial decision makers obtain a good estimate of a firm’s cost of capital? What are the consequences of using a discount rate that is higher or lower than a firm’s true required return?
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- Which of the following decision criteria is the easiest to use and very popular among investors? O Payback period. O Internal rate of return. O Average accounting return. Net present value. O Discounted return on investment.Suppose a firm invest in proects that are much riskier than its average investments. Do you think the firm's weighted average cost of capital will be affected? Explain.what are the shortcomings/ risk implications of improving net profit margin to increase Return on Equity?
- B3 ) Do you think that these techniques(Payback period traditional, Discount payback period modern ,net present value and profitability index ) are really helpful to financial managers?Which of the following does not assign a value to a business opportunity using time-value measurement tools? Group of answer choices A. internal rate of return (IRR) method B. net present value (NPV) C. discounted cash flow model D. payback period methodPractice : a: The computation of return on average investment ignores one characteristic of the earnings stream, which is considered in discounting cash flows. What is this characteristic? Why is it important? b: What are the disadvantages of evaluating an investment using payback period? Why might a company use this methodology despite these disadvantages?
- What is the capital asset pricing model (CAPM)? What does it tell us about the required return on arisky investment?Explain the link between the Weighted Average Cost of Capital (WACC) and leverage. If you use market values to calculate the WACC and your stock price or bond prices become erratic, elaborate how this will influence your capital structure and, as a result, the firm’s investment choice.We learned interest rates differ across firms, and it varies with a firm's investment horizons because investors (or lenders) consider borrower's risk. But how do they decide or evaluate the borrower's risk? Could you explain it combined with concepts or principles we have learned? (Hint: the opportunity cost of capital, but not limited to.)
- d) The cost of capital is sometimes referred to as the discount rate or the opportunity cost. What role does it play in the long-term investment decisions of any firm?The objective function of an investor in a CAPM world is to what (mathematically) [what are your trying to maximize]? What is the major assumption about the distribution of returns that we have to make to get to this objective function?Ceteris paribus, current financial market returns will increase as _____. Group of answer choices a. the uncertainty about the productivity of capital goods increases and people become more risk averse b. the uncertainty about the productivity of capital goods increases and people become less risk averse c. the uncertainty about the productivity of capital goods decreases and people become more risk averse d. the uncertainty about the productivity of capital goods decreases and people become less risk averse
