1. For a multinational firm that has both debt and equity in its capital structure, its financing cost can be represented by the weighted average cost of capital that is computed by:
a. weighing the pre-tax borrowing cost of the firm and the cost of equity capital, using the debt as the weight
b. weighing the after-tax borrowing cost of the firm and the cost of equity capital, using the debt as the weight
c. K = (1 – L )Kl +L (1- t)i where: K = weighted average cost of capital; Kl = cost of equity capital for a leveraged firm; i = before-tax borrowing cost; t= marginal corporate income tax rate; L = debt-to-total-market-value ratio
d. b) and c)
2. The weighted average cost of capital for a firm is the:
discount rate which the firm should apply to all of the projects it undertakes.
overall rate which the firm must earn on its existing assets to maintain its value.
rate the firm should expect to pay on its next bond issue.
maximum rate which the firm should require on any projects it undertakes.
rate of return that the firm's preferred stockholders should expect to earn over the long term.