Answer to Question 1
The reason we calculate a cost of capital is that it enables us to evaluate one or more of the firm's investment
opportunities. Remember that the cost of capital should reflect the riskiness of the project being evaluated, so a firm
should calculate multiple costs of capital when it makes investments in multiple divisions or business units having
different risk characteristics. Thus, for the calculated cost of capital to be meaningful, it must correspond directly to the
riskiness of the particular project being analyzed. That is, in theory the cost of capital should reflect the particular way
in which the funds are raised (the capital structure used) and the systemic risk characteristics of the project.
Consequently, the correct way to calculate capital structure weights is to use the actual dollar amounts of the various
sources of capital actually used by the firm. In practice, the mixture of financing sources used by a firm will vary from
year to year. For this reason, many firms find it expedient to use target capital structure proportions when calculating
the firm's weighted average cost of capital.
Answer to Question 2
B
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A company that makes cell phones has the following cost structure. They have fixed costs of ...
Structure of a skeletal muscle.
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