Which of the Following Statements Is FALSE

question 62

Multiple Choice

Which of the following statements is FALSE?

• A)The firm's unlevered cost of capital is equal to its pre-tax weighted average cost of capital - that is,using the pre-tax cost of debt,r_d,rather than its after-tax cost,r_d (1 - τ_c ).
• B)A firm's levered cost of capital is a weighted average of its equity and debt costs of capital.
• C)When the firm maintains a target leverage ratio,its future interest tax shields have similar risk to the project's cash flows,so they should be discounted at the project's unlevered cost of capital.
• D)The first step in the APV method is to calculate the value of free cash flows using the project's cost of capital if it were financed without leverage.

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Definitions:

Risk-Free Rate

The theoretical return on investment with no risk of financial loss, typically represented by the yield on government securities.

Actual Return

The real gain or loss that an investment has earned, including dividends, interest, and capital gains, over a specified time period.

Underpriced

A term describing an asset or security that is sold in the market for less than its intrinsic or true value.

Risk Premium

The extra return expected by an investor for holding a risky asset over a risk-free asset.