The Cost of Capital for a Firm, RWACC, in a Zero

question 66

Multiple Choice

The cost of capital for a firm, rWACC, in a zero tax environment is:

• A)equal to the expected earnings divided by market value of the unlevered firm.
• B)equal to the rate of return for that business risk class.
• C)equal to the overall rate of return required on the levered firm.
• D)is constant regardless of the amount of leverage.
• E)All of the above.

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Definitions:

Equity Method

An accounting technique used by firms to assess the profits earned from their investments in other companies, where they own a significant but not controlling interest, typically recognized as 20% to 50% ownership.

Consolidation

The process of combining the financial statements of a parent company with those of its subsidiaries to present as if the group is a single entity.

Shares

Units of ownership interest in a corporation or financial asset, providing a share in the profits and losses.

Financial Position

A term describing the financial health of a company, encompassing its assets, liabilities, and shareholders' equity, similar to a balance sheet but often referenced in broader financial analysis.