Which of the Following Statements About the Cost of Capital

question 54

Multiple Choice

Which of the following statements about the cost of capital is incorrect?

• A) A company's target capital structure affects its weighted average cost of capital.
• B) Weighted average cost of capital calculations should be based on the after-tax-costs of all the individual capital components.
• C) If a company's tax rate increases, then, all else equal, its weighted average cost of capital will increase.
• D) The cost of retained earnings is equal to the return stockholders could earn on alternative investments of equal risk.
• E) Flotation costs can increase the cost of preferred stock.

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Definitions:

User Cost

The cost of using a capital asset, considering both the depreciation of the asset and the opportunity cost of not investing the funds elsewhere.

Extracting

The process of removing or obtaining a resource from its source.

Unit of Resource

A specific quantity of a resource or input used in the production of goods or services.