Question

In: Finance

As a source of financing, once retained earnings have been exhausted, the weighted average cost of...

As a source of financing, once retained earnings have been exhausted, the weighted average cost of capital will

1.

decrease.
2.

change in an undetermined direction.
3.

increase.
4.

remain the same.

Solutions

Expert Solution

As a source of financing, once retained earnings have been exhausted, the weighted average cost of capital will INCREASE

Option 3 is correct.

Once retained earnings exhausted the company will face shortage of funds. it should either raise funds through debt funds or raise new capital. since shortage of funds customers taking high risk expected high returns and increases the overall cost of capital.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

The firm's weighted-average cost of capital is likely to _________________ if debt financing is used to...
The firm's weighted-average cost of capital is likely to _________________ if debt financing is used to excess. Select one: A. increase B. decrease C. remain unchanged D. collapse
4. The cost of retained earnings If a firm cannot invest retained earnings to earn a...
4. The cost of retained earnings If a firm cannot invest retained earnings to earn a rate of return (insert answer here) the required rate of return on retained earnings, it should return those funds to its stockholders. The cost of equity using the CAPM approach The current risk-free rate of return (rRFrRF) is 3.86% while the market risk premium is 5.75%. The D’Amico Company has a beta of 1.56. Using the capital asset pricing model (CAPM) approach, D’Amico’s cost...
The cost of retained earnings: If a firm cannot invest retained earnings to earn a rate...
The cost of retained earnings: If a firm cannot invest retained earnings to earn a rate of return_______________the required rate of return on retained earnings, it should return those funds to its stockholders. The cost of equity using the CAPM approach: The current risk-free rate of return (rRFrRF) is 4.67% while the market risk premium is 5.75%. The D’Amico Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, D’Amico’s cost of equity is ______________ ....
4. The cost of retained earnings If a firm cannot invest retained earnings to earn a...
4. The cost of retained earnings If a firm cannot invest retained earnings to earn a rate of return __________the required rate of return on retained earnings, it should return those funds to its stockholders. The cost of equity using the CAPM approach The current risk-free rate of return (rRFrRF) is 4.23% while the market risk premium is 6.17%. The Wilson Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Wilson’s cost of equity is...
What do retained earnings represent? Dividends are sometimes said to have been paid "out of retained...
What do retained earnings represent? Dividends are sometimes said to have been paid "out of retained earnings." What is the error, if any, in this statement? For what reasons might a company restrict a portion of its retained earnings? How are those restrictions reported?
Why does retained earnings have an opportunity cost? Shouldn't these be cost free funds for the...
Why does retained earnings have an opportunity cost? Shouldn't these be cost free funds for the firm to invest? Explain.
Weighted average cost of capital is a long way as to how much earnings a company...
Weighted average cost of capital is a long way as to how much earnings a company can achieve through the costs of its projects and ultimately any products that are sold. If you were the financial manager do you have a preference for how the company would be capitalized? Do you believe that awaiting skewed more toward debt would be advantageous or more equity?
The weighted average cost of capital is determined by _____ the weighted average cost of equity....
The weighted average cost of capital is determined by _____ the weighted average cost of equity. a. multiplying the weighted average aftertax cost of debt by b. adding the weighted average pretax cost of debt to c. adding the weighted average aftertax cost of debt to d. dividing the weighted average pretax cost of debt by e. dividing the weighted average aftertax cost of debt by
The weighted average cost of capital (WACC) is calculated as the weighted average of cost of...
The weighted average cost of capital (WACC) is calculated as the weighted average of cost of component capital, including debt, preferred stock and common equity. In general, debt is less expensive than equity because it is less risky to the investors. Some managers may intend to increase the usage of debt, therefore increase the weight on debt (Wd). Do you think by increasing the weight on debt (Wd) will reduce the WACC infinitely? What are the benefits and costs of...
The Cost of Capital: Cost of Retained Earnings The cost of common equity is based on...
The Cost of Capital: Cost of Retained Earnings The cost of common equity is based on the rate of return that investors require on the company's common stock. New common equity is raised in two ways: (1) by retaining some of the current year's earnings and (2) by issuing new common stock. Equity raised by issuing stock has a(n) cost, re, than equity raised from retained earnings, rs, due to flotation costs required to sell new common stock. Some argue...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT