Dividend growth model to determine firm cost of equity

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Reference no: EM132049328

A. Which one of the following statements is true?

The cost of capital for a project depends on the source of the funds used for the project.

The cost of capital for a firm is based solely on the firm’s source of equity financing.

The cost of capital for a project depends on how the funds are used.

The capital structure of a firm refers to the types of projects the firm accepts.

B. Which one of the following is an advantage to using the dividend growth model to determine a firm's cost of equity?

ease of use

applicable to all corporations

sensitivity to the growth rate

consideration of risk

C. Why is the tax rate applied to the cost of debt but not to the cost of equity or preferred when computing a firm’s weighted average cost of capital?

Interest on debt is tax-deductible, whereas dividends paid on common and preferred stock are not.

The corporate tax rate is included in the required rate of return on an equity security.

Money raised from a debt issue is treated as taxable income.

The tax rate is already considered when the cost of equity and cost of debt are initially computed.

Reference no: EM132049328

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