Question 2 3 pts When calculating WACC, what best describes an important adjustment that has to be made to the cost of capital to properly measure the cost of capital from different sources of funding to a business? Only preferred stock cost of capital has to be adjusted to show the benefit of tax deductions. All cost of capital has to be adjusted to reflect the benefit of taxes. The cost of capital provided from debt has to be adjusted for the tax benefits of the debt. The cost of all forms of capital have to be adjusted to reflect the pretax costs of the capital.
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Step 1: The WACC (Weighted Average Cost of Capital) is the average cost of all the capital a company uses to finance its operations. Show more…
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Which of the following statements is CORRECT? When calculating the cost of debt, a company needs to adjust for taxes because interest payments are deductible by the paying corporation. When calculating the cost of preferred stock, companies must adjust for taxes because dividends paid on preferred stock are deductible by the paying corporation. Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM. If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough retained earnings to take care of its equity financing and hence must issue new stock. Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC.
Akash M.
The Weighted Average Cost of Capital is calculated using all the different costs in an after-tax basis. However, not all the components of the WACC require an adjustment for taxes. What component of the capital structure needs to be adjusted by taxes for the WACC calculation? Retained Earnings Common Equity Cash Long Term Debt Preferred Equity
Adi S.
Which of the following statements is most correct? 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 marginal costs rather than historical costs of capital. Answers a and b are correct None of the answers above is correct.
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