How is the rate of return necessary to satisfy both debt holders and stockholders classified__________?
Show answer Hide answer
Answer: B. Weighted average cost of capital
Explanation
The blended cost of debt and equity required to satisfy both debt holders and stockholders is the weighted average cost of capital. Firms must earn this minimum return on their investments to maintain the market value of their securities. Weights are assigned based on the proportional representation of debt and equity in the capital structure. Capital structure represents the specific mix of long-term debt and equity utilized by a corporation. Cost of equity reflects the return demanded by stockholders given the risk profile of the business. After-tax cost of debt is used because interest payments on corporate borrowings are generally tax-deductible.
Weighted average cost of interest ignores the equity component demanded by company stockholders entirely. Weighted average salvage value relates to asset depreciation and disposal rather than ongoing financing costs. Mean cost of capital is an imprecise statistical descriptor rather than the standard financial terminology.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
Related questions
Q1. What is the profitability index rule regarding investment acceptance if the index exceeds___________?
Show answer Hide answer
Answer: C. 1
The profitability index rule states that an investment project should be accepted if its index exceeds one. An index value greater than one indicates that the present value of inflows exceeds initial cash outflows. This...
Q2. What is the rate of return generated by an investment for its investor classified as__________?
Show answer Hide answer
Answer: B. Internal rate of return
The internal rate of return represents the exact discount rate that makes net present value equal to zero. It measures the annualized rate of return that an investor expects to receive over the holding period. By equatin...
Q3. What relationship must exist between nominal rate expected cash flows and real rate expected cash flows______________?
Show answer Hide answer
Answer: B. Equal
Theoretical financial models typically assume a consistent internal relationship between nominal and real cash flow expectations. Consistency between cash flow projections and discount rates prevents valuation distortion...
Q4. What is the required return rate of debt holders utilized to estimate__________?
Show answer Hide answer
Answer: A. Cost of debt
The cost of debt represents the effective interest rate a company pays on its borrowed funds. It evaluates the required return demanded by lenders and bondholders who provide financing to the business. Computing this cos...
Q5. What is the sum of the real risk-free interest rate and an inflation premium equal to_____________?
Show answer Hide answer
Answer: B. Quoted risk-free interest rate
The quoted risk-free rate is equal to the sum of the real risk-free rate and an inflation premium. Investors demand compensation for the loss of purchasing power caused by expected future inflation. Adding this inflation...
Q6. How is the purchase cost of an asset spread over its useful life classified_________?
Show answer Hide answer
Answer: B. Depreciation
Depreciation allocates the historical acquisition cost of physical assets systematically over their useful operating lives. Accounting matching principles require recognizing asset wear and tear across the periods benefi...