Under Normal Circumstances, the Weighted Average Cost of Capital Is

question 50

Multiple Choice

Under normal circumstances, the weighted average cost of capital is used as the firm's required rate of return because

• A)as long as the firm's investments earn returns greater than the cost of capital, the value of the firm will not decrease.
• B)returns below the cost of capital will cover all the fixed costs associated with capital and provide excess returns to the firm's stockholders.
• C)it is comparable to the average of all the interest rates on debt that currently prevail in the financial markets.
• D)it is an indication of the return the firm is earning from all of its assets in combination.

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Definitions:

Compound Interest

The addition of interest to the principal sum of a loan or deposit, where the interest that has been added also earns interest.

Equal Payments

A repayment structure where payments are the same amount each period, as seen in some loans and mortgages.

Annuity Due

An annuity whose payments are made at the beginning of each period.

Future Amount

The expected value of an asset or amount of money at a specific date in the future, often factoring in variables like interest rates and compounding periods.