What is the purpose of cost of capital in investment decision-making?

Determine the market value of the firm

Calculate the present value of future cash flows

Measure the worth of investment proposals

Allocate capital to investment projects

According to John J. Hampton, how is the cost of capital defined?

The minimum required rate of earnings

The rate of return required to increase the firm's value

A cut-off rate for allocating capital to projects

The rate that must be earned on net proceeds

What happens if a firm fails to earn return at the expected rate?

Market value of shares will increase

Market value of shares will remain unchanged

Market value of shares will fall

Overall wealth of shareholders will increase

What are the three basic risks associated with the cost of capital?

Zero risk level, business risk, and financial risk

Market risk, credit risk, and liquidity risk

Interest rate risk, inflation risk, and exchange rate risk

Operational risk, legal risk, and reputational risk

How can the significance of cost of capital be described?

Maximizing the value of the firm

Influencing capital budgeting decisions

Guiding dividend policy decisions

What is the role of cost of capital in capital budgeting decisions?

Determines the desirability of investment projects

Calculates the net present value of cash flows

Provides the rate of discounting for future cash flows

Why is the estimation of cost of capital necessary for leasing decisions?

Determines the profitability of leasing arrangements

Helps in evaluating alternative leasing policies

Assists in assessing the cost of carrying investment in leases

How does cost of capital influence the capital structure of a firm?

Determines the proportion of debt and equity

Guides the choice of financial sources

Minimizes the overall cost of capital

How can the cost of capital be used to evaluate the financial performance of top management?

By comparing the actual profitability with the cost of capital

By assessing the risk associated with investment projects

By analyzing the market value of the firm's shares

By evaluating the efficiency of working capital management

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