Question

Which of the following statements is most correct? Question 6 options: Since stockholders do not generally pay corporate taxes, corporations should focus on before-tax cash flows when calculating the weighted average cost of capital (WACC). When calculating the weighted average cost of capital, firms should include the cost of accounts payable. When calculating the weighted average cost of capital, firms should rely on historical costs rather than marginal costs of capital. Answers a and b are correct None of the answers above is correct.

Answer 1

Since stockholders do not generally pay corporate taxes, corporations should focus on before-tax cash flows when calculating the weighted average cost of capital (WACC)- This is false as firms must focus on after tax cash flows.

When calculating the weighted average cost of capital, firms should include the cost of accounts payable.- For calculating WACC only the costs of long term debt and equity are taken. Accounts payable are not considered.

When calculating the weighted average cost of capital, firms should rely on historical costs rather than marginal costs of capital.- Infact firms must use marginal cost of capital to calculate WACC as it is the cost of additonal capital that determines the risk of the firm

Answer is e ) None of the above