If a company fails to accurately predict it's cost of equity,then
A)the firm's wacc will also be inaccurate.
B)the firm may not be using the proper interest rate to estimate NPV.
C)the firm my incorrectly accept or reject projects based on decisions made using the cost of capital computed with an incorrect cost of equity.
D)all of the above are true.

Question

Quizplus · Accepted Answer

If a company fails to accurately predict its cost of equity, then all the consequences mentioned in choices A, B, and C can happen. The cost of equity is an essential input in WACC calculation, and an inaccurate cost of equity leads to an inaccurate WACC. An incorrect interest rate in NPV estimation can lead to the wrong investment decision. Moreover, the valuation of projects based on a flawed cost of capital may lead to incorrect acceptance or rejection decisions. Therefore, all the options (A, B, and C) are true if a company fails to predict its cost of equity correctly.

If a Company Fails to Accurately Predict It's Cost of Equity,then