4. After performing the analysis about WACC on Nike and Royal Mail, what are some bestpractice principles to remember for estimating a corporate cost of capital? a) The cost of capital is influenced by the market conditions and the firm’s position in the market b) The cost of capital reflects after-tax effects in financing policy. As the firm gets an interest tax shield for its debt. Firms can reduce their tax liability by external financing in the form of debt, provided it has the capacity to pay it back. c) The cost of capital reflects the current opportunity the investors demand as a return on their investment compared to other forms of investments with a similar risk and time period d) When considering a decision or a project, the cost of capital should include the current market values and not the historical book values as book values don’t reflect the firm’s present value accurately. e) In estimating the cost of capital, weighted cost of debt and weighted cost of equity are used. The weights are calculated against the firm’s market value. f) The cost of capital reflects the capital structure of the firm and equivalent risk related to the underlying cash flows of the firm. g) While estimating the cost of equity, it is important to consider whether the firm sees a constant growth or an uneven growth. h) The cost of debt should reflect the current cost of debt as well as the contingent financing the firm might need
You've reached the end of your free preview.
Want to read all 3 pages?