Chp12_ReviewAnswers

Chp12_ReviewAnswers - Chapter 12 Determining the Cost of...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 12 Determining the Cost of Capital Answers to Chapter 12 Review Questions 1. The WACC measures the average return required on the assets of the firm to satisfy the investor base of the firm. It shows how much managers must earn on the assets of the firm in order for investors to earn their required rates of return on their investment. 2. Market weights are used because market values are forward-looking while book values are historical and backwards-looking. Since investors use market values to make investment decisions, managers should use market weights in order to accurately estimate the return on asset required to satisfy investors. 3. The coupon rate sets the level of coupon payments over the life of the bond. This rate is locked in when the bond is issued; thus, this is a historical rate of return. Market conditions change, and for the cost of debt the firm should use the rate of return that bond investors currently demand on the debt. This is the yield to maturity.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 2

Chp12_ReviewAnswers - Chapter 12 Determining the Cost of...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online