COST ACCOUNTING
PERFORMANCE MEASUREMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The risk of its underlying businesses.
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Its relationship with investors.
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Its choices of sources of capital.
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The corporate income tax rate.
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Detailed explanation-1: -To determine cost of capital, business leaders, accounting departments, and investors must consider three factors: cost of debt, cost of equity, and weighted average cost of capital (WACC).
Detailed explanation-2: -A company’s current cost of capital is based on: both the returns currently required by its debtholders and stockholders. All else constant, which one of the following will increase a company’s cost of equity if the company computes that cost using the security market line approach?
Detailed explanation-3: -Importance of Cost of Capital Businesses and financial analysts use the cost of capital to determine if funds are being invested effectively. If the return on an investment is greater than the cost of capital, that investment will end up being a net benefit to the company’s balance sheets.
Detailed explanation-4: -A firms cost of capital is generally the weighted average of the cost of debt plus the cost of preferred stock plus the cost of equity and retained earnings as per their weights in the capital structure.