1. The cost of capital is used as a discount rate because:
A) it is an indication of how much the firm is earning overall.
B) as long as the cost of capital is earned, the common stock value of the firm will be maintained.
C) it is comparable to the prevailing market interest rates.
D) returns below the cost of capital will cover all fixed costs associated with capital and provide an excess return to shareholders.
5. The overall weighted average cost of capital is used instead of costs for specific sources of funds because:
The overall weighted average cost of capital is used instead of costs for specific sources of funds because:
A) use of the cost for specific sources of capital would make investment decisions consistent.
B) it is the minimum point for the firms cost of capital given the current equity mix.
C) investments funded by low cost debt would have a disadvantage over other investments.
D) a project with the lowest return would always be accepted under the specific cost criteria.