Reference no: EM131435225
1) The WACC formula calculates the after-tax cost of debt, but it doesn't make any similar adjustments to the cost of preferred stock or common equity. Why the difference?
2) When the company exhausts its retained earnings, equity will have to be raised as new commons stock; flotation costs will cause the cost of equity to rise (a "breakpoint"). Are there similar breakpoints in the costs of other forms of capital. For example, does the cost of debt rise as the company borrows more and more? And if so, what effect does that have on the overall WACC? If you were to graph the cost of capital (the y-axis) as a function of the amount of capital raised (the x-axis), what would that graph look like?
3) Continuing (sort of) with the previous discussion, it has been said that the limiting factor in determining a company's capital budget is not the availability of capital itself; rather, it's the supply of "good" projects. Can you explain that? (Think about what we mean by a "good" project...)
4) In general terms, the company's cost of capital depends on its riskiness, viewed from the perspective of the providers of capital. If the company decides to invest in a new, higher-risk project, would that result in a higher WACC? In other words, is there a different WACC for every different project? Seems complicated, doesn't it?
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