Asked by
Abhishek Aggarwal
on Dec 09, 2024
Verified
Assume there are no personal or corporate income taxes and that the firm's WACC is unaffected by its capital structure, then a firm's cost of equity depends on the firm's business and financial risks.
WACC
Stands for Weighted Average Cost of Capital; it represents the average rate of return a company is expected to pay its security holders to finance its assets.
Business Risks
The exposure a company or organization faces from factors that may affect its ability to achieve its objectives or financial goals.
Financial Risks
The risk of experiencing financial loss from an investment or entrepreneurial activity.
- Understand the relationship between a firm's business risk, financial policy, and its impact on equity beta.
- Understand the principles behind Modigliani and Miller propositions related to capital structure, taxes, and the cost of capital.
Verified Answer
GB
Learning Objectives
- Understand the relationship between a firm's business risk, financial policy, and its impact on equity beta.
- Understand the principles behind Modigliani and Miller propositions related to capital structure, taxes, and the cost of capital.