Question

QUESTION 3 A shareholder's return is important to corporate managers because

		it is a cost for the firm
		it determines the firm's cost of borrowing
		it represents the cashflow return to shareholders
		it is inversely related to the firm's bond prices

Answer 1

The cost of equity or the expected rate of return by shareholders is used to compute the weighted average cost of capital or the cost of borrowing by a firm. Hence the second option is correct.

The first option is not apt as its not really an expense or cost. The cost of equity refers to the cost of borrowing equity.

The third option is not correct as shareholders receive returns in the form of stock price appreciation or dividends.

The fourth option is not correct as yield and bond prices are inversely related.