Question

Which of following statements is not correct? (explain why D is correct answer)

a) Accounts payable, accruals, and deferred taxes are not sources of funding that come from investors, so they are not included in the calculation of the cost of capital.

b)Capital components are sources of funding that come from investors: debt, preferred stock, common equity.

c) Tax effects associated with financing can be incorporated either in capital budgeting cash flows or in cost of capital.

d) The cost of capital is used primarily to make decisions which involve raising and investing new capital. So, we should focus on historical (embedded) costs rather than new (marginal) costs.

Answer 1

D is wrong;

The first statement of option D is correct. ie: "The cost of capital is used primarily to make decisions which involve raising and investing new capital." Because of this we should focus on new or marginal cost rather than historical cost and not the opposite. Since for new projects current cost of capital calculation is needed checking historical costs associated with a project wont be making much of a sense.

----All the other statements are correct.----