Texts: TB MC Qu. 11-108 Which of the following statements is... Which of the following statements is correct? Multiple Choice The WACC measures the before-tax cost of capital. An increase in the firm's marginal corporate tax rate will decrease the weighted average cost of capital. Flotation costs can decrease the weighted average cost of capital. None of these choices are correct.
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Step 1: The WACC measures the before-tax cost of capital. Show more…
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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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Which of the following statements is correct? a. The percentage flotation cost associated with issuing new common equity is typically smaller than the flotation cost for new debt. b. The WACC as used in capital budgeting is an estimate of the cost of all the capital a company has raised to acquire its assets. c. There is an "opportunity cost" associated with using reinvested earnings, hence they are not "free." d. The WACC as used in capital budgeting would be simply the after-tax cost of debt if the firm plans to use only debt to finance its capital budget during the coming year. e. The WACC as used in capital budgeting is an estimate of a company's before-tax cost of capital.
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Which one of the following statements is INCORRECT concerning the equity component of the WACC? A. The equity component of WACC reflects the return expected by the company's shareholders. B. Market values should be used in calculating WACC. C. Preferred equity is a separate component of WACC. D. There is no tax shield on the dividends paid.
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