Cost of Capital: Determine whether each of the following would increase or decre
ID: 1234829 • Letter: C
Question
Cost of Capital: Determine whether each of the following would increase or decrease the firm's cost of capital for investment project evaluation. Explain.A.
The company's stock price suffers a sharp decline, but no decline in the company's earnings potential is perceived.
B.
A merger with a leading competitor increases the company's stock price substantially.
C.
The company's home state increases the corporate state income tax.
D.
In an effort to spur business activity, Congress cuts corporate income taxes.
Explanation / Answer
Answer:
A) Decrease
Reason:
Cost of capital for investment project evaluation would not decrease because firm's earnings are not being affected.
B) Increase
Reason:
Cost of capital for investment project evaluation would increase owing to a merger with a leading competitor increasing the company's stock price substantially.
C) Increase
Reason:
Cost of capital for investment project evaluation would increase as tax has negative effect on income.
D) Decrease
Reason:
Cost of capital for investment project evaluation would decrease as tax cuts when go to a specific side benefits it.