Which of the Following Statements Regarding the Determination of the Weighted-Average

question 34

Multiple Choice

Which of the following statements regarding the determination of the weighted-average cost of capital (WACC) is not true?

• A) The capital asset pricing model (CAPM) cannot be used to estimate the cost of debt for a company.
• B) The capital asset pricing model (CAPM) can be used to estimate the cost of equity for a non-public company.
• C) In estimating the cost of debt, the analyst typically estimates the current yield-to-maturity of the debt instruments in the company's capital structure.
• D) Market, not book, values of the components of capital are preferable in terms of determining weights for the weighted-average calculation.
• E) The cost of preferred stock is included in the estimation process.

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Definitions:

Initial Outlay

The initial investment amount needed to fund a project or investment.

Cost of Capital

The rate of return that a company must earn on its project investments to maintain its market value and attract funds.

Capital Budgeting

The process of planning and managing a company's long-term investments in major projects or assets.

Mutually Exclusive Projects

Projects where acceptance of one automatically excludes the acceptance of the other due to competing resources.