Question

Question 7 (Mandatory) (1 point) When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm's cash flows as: O a weighted average of the capital components costs. O they apply to each asset as they are purchased with their respective forms of debt or equity. O a sum of the capital components costs. O a simple average of the capital components costs.

Answer 1

Answer Question: A weighted average of the Capital components Costs. To calculate WACC, multiply the cost of each Capital component by its proportional weight and take the sum of the results. If the cash flow belongs to the entire firm (Free cash flow to firm), we must use WACC. However, in case of cash flow to equity holders, we use required return on equity. Question: yield to maturity is the total expected return on a bond which is expressed as annual rate. To estimate the beforer tan cost of debt, the yield to maturity should be calculated Hence Option A (le to estimate the before- tan cost of debt, we need to solve for the yield to Maturity (YTM) on the firm's existing debt) is correct. Question : © option B is correct answer. - If We are calculating WACC for the firm, then equity , preferred stock and debt would be the entire market value for each source of - Capital cs Camsenwith_ The End = Scathed with CamScanner