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Which of the following statements is true regarding the estimation of a firm's weighted average cost of capital, WACC? Select one: a
Which of the following statements is true regarding the estimation of a firm's weighted average cost of capital, WACC? Select one: a. WACC should be estimated as an embedded (historical) cost of capital on a before tax basis b. WACC should be estimated as a marginal cost of capital on an after-tax basis C. WACC should be estimated as a marginal cost of capital on a before tax basis d. WACC should be estimated as an embedded (historical) cost of capital on an after-tax basis Methods for estimating a firm's cost of equity include all of the following except Select one: a. Bond Yield Plus Expected Risk Premium b. Security Market Line, SML C. Constant Growth Model Approach ed. Standard Deviation Adjustment Approach
Expert Solution
Answer 1
Option a is incorrect, as WACC is not based on historical cost
Option b is correct, as WACC also known as Weighted Average Marginal Cost of capital and it is based on after tax basis.
Option c is incorrect, as it is based on after tax basis.
Option d is incorrect, as WACC is not based on historical cost
Answer 2
Option a is incorrect, as Bond Yield Plus Expected Risk Premium it is used to estimate cost of equity
Option b is incorrect, as Security Market Line, SML is used to estimate cost of equity
Option c is incorrect, as Constant Growth Adjustment used to estimate cost of equity
Option d is correct, as Standard Deviation Adjustment is not used to calculate the cost of equity.
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