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Question(s) / Instruction(s):

Which of the following statements is CORRECT?

a. The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project, i.e., it is the after-tax cost of debt if debt is to be used to finance the project or the cost of equity if the project will be financed with equity.
b. The after-tax cost of debt that is used as the component cost when calculating the WACC is the average after-tax cost of the firms outstanding debt.
c. Suppose some of a publicly-traded firms stockholders are not diversified; they hold only the one firms stock. In this case, the CAPM approach will result in an estimated cost of equity that is too low in the sense that if it is used in capital budgeting, projects will be accepted that will not maximize the firms intrinsic values.
d. The bond-yield-plus-risk-premium approach is the most sophisticated and objective method for estimating a firms cost of equity capital.
e. The cost of equity is generally harder to measure than the cost of debt because there is no stated, contractual cost number on which to base the cost of equity.

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