Question 1: When you determine the cost of equity and cost of debt for a firm, which one can be found with greater accuracy? Why is that so? Question 2: Why do we have to calculate the WACC of a...

Solution 1:-
While determining the cost of debt and cost of equity we can maintain more accuracy in
calculating the cost of debt. The reason why computing cost of debt is more accurate as
compared to computing the cost of equity is that while determining the cost of debt the
parameters used are fixed in nature such as interest rate, time of maturity, tax rate, compounding
factor, whereas while determining the cost of equity we use factors which are not fixed such as
the expected growth rate, beta of the firm. Thus we can say that computing cost of debt is more
accurate as compared to computing the cost of equity.
Solution 2:-
Cost of capital plays vital role in project evaluation; basic purpose behind undertaking any
project is to earn desired profit. Projects are evaluated to estimate whether a project is able to
provide the desired rate of return to the investors or not. While evaluating project a...