Question

Based on your understanding of the concept of cost of capital, which of the following statements are valid? Choose all that apply.

a. Companies have free cash flow that is available for distribution, and investors expect to earn a certain required rate of return if it is invested.
b. The company's weighted average cost of capital (WACC) incorporates the required rates of return that investors expect as a compensation for the risk.
c. The required rate of return for long-term debt capital funding is incorporated seperately in project analysis, because it is not included in the weighted average cost of capital (WACC).
d. The weighted average cost of capital (WACC) is considered the overall rate expected to generate required returns for investors, but companies do not use it while discounting project cash flows.

Answer 1

Based on the concept of cost of capital, valid statements include companies having free cash flow for distribution and investors expecting a required rate of return, the weighted average cost of capital (WACC) incorporating required rates of return, and the required rate of return for long-term debt not being included in WACC.

Step-by-step explanation:

Based on the concept of cost of capital, the following statements are valid:

1. a. Companies have free cash flow that is available for distribution, and investors expect to earn a certain required rate of return if it is invested. This means that companies have funds that can be used for investment, and investors expect a certain return on their investment.
2. b. The company's weighted average cost of capital (WACC) incorporates the required rates of return that investors expect as a compensation for the risk. WACC is a measure of the cost of capital for a company and takes into account the required rates of return that investors expect to compensate for the risk they are taking.
3. c. The required rate of return for long-term debt capital funding is incorporated separately in project analysis, because it is not included in the weighted average cost of capital (WACC).