Which of the Following Statements Is CORRECT

question 58

Multiple Choice

Which of the following statements is CORRECT?

• A) A change in a company's target capital structure cannot affect its WACC.
• B) WACC calculations should be based on the before-tax costs of all the individual capital components.
• C) Flotation costs associated with issuing new common stock normally reduce the WACC.
• D) If a company's tax rate increases,then,all else equal,its weighted average cost of capital will decline.
• E) An increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing.

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Definitions:

Discount Rate

The interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows.

Net Present Value

An evaluation metric that calculates the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Capital Budgeting Decisions

The process of making investment decisions in fixed assets or projects with long-term implications for an organization's financial health.

Accounting Rate of Return

A financial ratio used to estimate the profitability of an investment, calculated as average annual profit divided by initial investment cost.