Question

Which of the following statements is correct? Group of answer choices I

f a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline.

WACC calculations should be based on the before-tax costs of all the individual capital components.

A change in a company's target capital structure cannot affect its WACC. An increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing.

Flotation costs associated with issuing new common stock normally reduce the WACC.

Answer 1

WACC = [ We * ke ] + [ Wd * Kd ] + [ Wp * Kp ]

We- Weight of Equity

Wd - Weight in Debt

Wp - Weight in Preference shares

Ke - Cost of Equity

Kd - Cost after tax

Kp - COst of preference shares

Option A:

As Tax rate increase, Cost after tax will decrease and results into decrease in WACC

OPtion B:

As Kd - is after tax cost of debt which is considered in WACC calculation. Statement is wrong.

Option C:

As weights are considered, change in capital structire will affect the WACC. Statement is wrong.

Option D:

Increase in Rf will increase marginal cost of debt as well as equity financing. Statement is wrong

OPtion E:

Flatation cost will rise the cost of equity. stetament is wrong.

Ke = D1 / P0 (1 - flotation Cost)

Pls do rate, if the answer is correct and comment, if any further assistance is required.