Chapter 11 Discussion Questions
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| 11-1. | Why do we use the overall cost of capital for investment decisions even when only one source of capital will be used (e.g., debt)? |
| 11-2. | How does the cost of a source of capital relate to the valuation concepts presented previously in Chapter 10? |
| 11-3. | In computing the cost of capital, do we use the historical costs of existing debt and equity or the current costs as determined in the market? Why? |
| 11-4. | Why is the cost of debt less than the cost of preferred stock if both securities are priced to yield 10 percent in the market? |
| 11-5. | What are the two sources of equity (ownership) capital for the firm? |
| 11-6. | Explain why retained earnings have an opportunity cost associated? |
| 11-7. | Why is the cost of retained earnings the equivalent of the firm’s own required rate of return on common stock (Ke)? |
| 11-8. | Why is the cost of issuing new common stock (Kn) higher than the cost of retained earnings (Ke)? |
| 11-9. | How are the weights determined to arrive at the optimal weighted average cost of capital? |
| 11-10. | Explain the traditional, U-shaped approach to the cost of capital. |
| 11-11. | It has often been said that if the company can’t earn a rate of return greater than the cost of capital it should not make investments. Explain. |
| 11-12. | What effect would inflation have on a company’s cost of capital? (Hint: Think about how inflation influences interest rates, stock prices, corporate profits, and growth.) |
| 11-13. | What is the concept of marginal cost of capital? |