Which of the following is true of the cost of capital method of valuation?
A) It is generally more tedious to calculate than alternative methodologies
B) It requires the separate estimation of the present value of future tax savings
C) It adds the present value of the firm without debt to the present value of tax savings
D) It does not adjust the discount rate as debt is repaid
E) All of the above

Question

Quizplus · Accepted Answer

The cost of capital method of valuation usually involves multiple steps and requires the estimation of various variables, making it more tedious to calculate than other valuation methodologies.

Answer: D 
 The cost of capital method of valuation assumes a constant discount rate throughout the life of the project and does not adjust the discount rate as debt is repaid, making it a limitation of this method.

Therefore, the correct answer is A and D.

Which of the Following Is True of the Cost of Capital