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Chapter 12 Pages 421 Answers

Chapter 12 Pages 421 Answers - Chapter 12 Pages 421-422 1...

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Unformatted text preview: Chapter 12 Pages 421-422 1. What does the WACC measure? The weighted average cost of capital (WACC) measures a company’s overall cost of capital as weighted average of its equity and debt costs of capital. 2. Why are market-based weights important? Market-based weights are important because they are used in order to calculate the net present value (NPV) and they are mostly preferred because financial managers have interest in market values, not book values. 3. Why is the coupon rate of existing debt irrelevant for finding the cost of debt capital? Many companies are doing a mistake when using the coupon rate as the cost of debt. The correct cost of debt capital is the YTM (yield to maturity) of the firm’s debt, not the coupon rate on its existing debt. One company’s cost of debt is the interest rate that the company will be paying on new loans, like new bond issues. This rate is different from the coupon’s rate of existing debt of that company, which shows the interest rate that the company needed to offer...
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Chapter 12 Pages 421 Answers - Chapter 12 Pages 421-422 1...

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