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AVATAR III Page 4 Corporate Finance Question:

Which of the following statments about the cost of capital is false ?
a. If the firm needs more funding than can be supported by Retaining Earnings the firm's WACC will increase;

b. As the firm raises more and more capital, market efficiency would indicate that the firm's marginal weighted average cost of capital shoud fall

c. Assuming constant risk, the firm's margical weighted average cost of capital is the correct discount rate to use in making capital budgeting decisions.

I think B should be wrong since the MCC is increasing per Curriculum 4 page 46.
Statement C is correct since the assumption is "constant risk"

choice c:是不是只有当项目风险和公司风险相同的时候,才可以用公司的MCC来给项目作budget。

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我完全同意你的说法
B should be wrong since the MCC is increasing

Statement C is correct since the assumption is "constant risk"

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thx.

Further question on this topic.

When is MCC equal to WACC ?

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o  
2      As long as capital costs remain constant (as need for more capital increases), the MCC=WACC.

2      However, as more expensive capital is used, the MCC varies from WACC.

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我觉有有点小小的问题关于C, 我觉得风险constant只代表beta一样,当时如果capital structure变化,应该还是不能用wacc来折现的吧??

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我们是从资金供给者的角度来看待问题,所以,项目都是用WACC来折现(如果项目的风险与公司的风险保持一致)或者用项目风险相对应的折现率。
由于在项目评估时(capital budget),我们没有减去利息,所以,整个资金供给者的角度来看待问题。

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