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12 June, 02:02

A firm's weighted average cost of capital is a function of (1) the individual costs of capital, (2) the capital structure mix, and (3) the level of financing necessary to make the investment. True False

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  1. 12 June, 03:05
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    Answer: False

    A firm's weighted average cost of capital is a function of the capital structure mix

    Explanation:

    The capital structure of a firm is the proportion of debt and equity that result in the lowest weighted average cost of capital (WACC).

    A firm's total cost of capital is a weighted average of the cost of equity and the cost of debt, known as the weighted average cost of capital (WACC).

    The formula is equal to:

    WACC = (E/V x Re) + ((D/V x Rd) x (1 - T))

    Where:

    E = market value of the firm's equity (market cap)

    D = market value of the firm's debt

    V = total value of capital (equity plus debt)

    E/V = percentage of capital that is equity

    D/V = percentage of capital that is debt

    Re = cost of equity (required rate of return)

    Rd = cost of debt (yield to maturity on existing debt)

    T = tax rate
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