The Moon Illusion Refers to Our Tendency to Perceive the Moon

question 80

Multiple Choice

The Moon illusion refers to our tendency to perceive the Moon as unusually

• A) large when it is near the horizon.
• B) large when it is high in the sky.
• C) bright when it is near the horizon.
• D) bright when it is high in the sky.

Understand the relationship between the returns required by investors and the firm's cost of capital components.

Recognize the significance of market values in calculating the cost of capital over book values.

Know the concept of target capital structure and its relevance to the WACC.

Learn how the marginal cost of capital (MCC) and investment opportunity schedule (IOS) guide capital budgeting decisions.

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Definitions:

Cost of Equity

The return a firm theoretically pays to its equity investors to compensate them for the risk they undertake by investing their capital.

WACC

Weighted Average Cost of Capital; an estimation of a corporation's cost of capital, with each capital category being weighted in proportion.

Cost of Equity

The return that shareholders require on their investment in the company, often estimated using models such as the Capital Asset Pricing Model (CAPM).