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, it can lead to several issues. Firstly, it can result in an inaccurate estimation of the firm's WACC (weighted average cost of capital) since cost of equity is one of the components of WACC. Secondly, if the firm is using the cost of capital computed with an incorrect cost of equity to evaluate projects, it may lead to incorrect decisions regarding the acceptance or rejection of projects. Additionally, if the interest rate used to estimate NPV is not the proper one due to the incorrect cost of equity, it can also impact the accuracy of the calculation. Therefore, all the given options are true.

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