Chi Towns
Week 4 Discussion Questions
By: Efrain Gonzalez
FIN/370
June 26, 2012
Ghassan Rahal
1) What are main elements in calculating the cost of capital? How does an increase in debt affect it? How do you identify an organization’s optimal cost of capital? a) The main elements in calculating the cost of capital is the opportunity cost of all capital invested in an enterprise. b) An increase in debt affects it because the cost of debt capital is equivalent to the actual or imputed interest rate on the company’s debt, adjusted for the tax- deductibility of interest expenses. c) An organization’s optimal cost of capital can be identified by calculating the cost of each kind of capital that the enterprise uses most like debt and equity. 2) What is meant by weighted average cost of capital (WACC)? What are some components of WACC? Why is WACC a more appropriate discount rate when doing capital budgeting? What is the effect on WACC when an organization raises long-term capital? a) Weight average cost of capital is calculated by averaging all of the capital costs acquired by an organization. b) Some components of WACC are several different types of capital which are stocks, bonds, and common equity. c) WACC is a more appropriate discount rate when doing capital budgeting because it gives the average cost of every dollar of cash employed inside the business. d) The effect on WACC when an organization raises long- term capital is an increase in the value of dollars earned and dollars spent within the
By: Efrain Gonzalez
FIN/370
June 26, 2012
Ghassan Rahal
1) What are main elements in calculating the cost of capital? How does an increase in debt affect it? How do you identify an organization’s optimal cost of capital? a) The main elements in calculating the cost of capital is the opportunity cost of all capital invested in an enterprise. b) An increase in debt affects it because the cost of debt capital is equivalent to the actual or imputed interest rate on the company’s debt, adjusted for the tax- deductibility of interest expenses. c) An organization’s optimal cost of capital can be identified by calculating the cost of each kind of capital that the enterprise uses most like debt and equity. 2) What is meant by weighted average cost of capital (WACC)? What are some components of WACC? Why is WACC a more appropriate discount rate when doing capital budgeting? What is the effect on WACC when an organization raises long-term capital? a) Weight average cost of capital is calculated by averaging all of the capital costs acquired by an organization. b) Some components of WACC are several different types of capital which are stocks, bonds, and common equity. c) WACC is a more appropriate discount rate when doing capital budgeting because it gives the average cost of every dollar of cash employed inside the business. d) The effect on WACC when an organization raises long- term capital is an increase in the value of dollars earned and dollars spent within the