Question

which of the following statements is correct? A. The weighted average cost of capital (WACC) is calculated using before-tax costs for all components B. The after-tax cost of debt usually exceeds the after-tax cost of equity C. For a given firm, the after-tax cost of debt is always more expensive than the after-tax cost of nonconvertible preferred stock D. Retained earnings that were generated in the past and are reported on the firm's balance sheet are available to finance the firm's capital budget during the coming year. E. The WACC that should be used in capital budgeting in the firm's marginal, after-tax cost of capital

Answer 1

which of the following statements is correct?

CORRECT ANSWER : E. The WACC that should be used in capital budgeting in the firm's marginal, after-tax cost of capital

EXPLANATION : The weighted average cost of capital (WACC) is ALWAYS calculated using AFTER-tax costs for all components, SO A IS NOT CORRECT

IF COST OF DEBT IS HIGER THAN COST OF EQUITY, THEN NO FIRM CAN MAKE PROFIT. SO B IN NOT CORRECT.

C IS NOT CORRECT BECAUSE COST OF DEBT MAY BE HIGHER OR LOWER, NOT NECESSARILY HIGHER

D IS ALSO NOT CORRECT BECAUSE RETAINED EARNINGS OF PAST MAY BE ALREADY INVESTED, SO MAY NOT BE AVAILABLE FOR ANY NEW PROJECT