1) What role does the weighted average cost of capital play when determining a project’s cost of capital? Provide an example. 2) What are some advantages of the subjective approach to determining the cost of capital and why do you think that approach is utilized? Provide an example. 3) Give an example of a situation where a firm should adopt the pure play approach for determining the cost of capital for a project. 4) Suppose your boss comes to you and asks you to re-evaluate a capital budgeting project. The first evaluation was in error, he explains, because it ignored flotation costs. To correct for this, he asks you to evaluate the project using a higher cost of capital which incorporates these costs. Is your boss’ approach correct? Why or why not? 5) Explain how the use of internal equity rather than external equity affects the analysis of a project.
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