Which of the Following Statements Best Describes Cost of Capital

question 78

Multiple Choice

Which of the following statements best describes cost of capital?

• A) If a company assigns the same cost of capital to all of its projects regardless of each project's risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject.
• B) Because of the risk of bankruptcy, the cost of debt is always higher than the cost of equity capital.
• C) Because no flotation costs are required to obtain capital as retained earnings, the cost of retained earnings is generally lower than the after-tax cost of debt.
• D) Higher flotation costs tend to reduce the cost of equity capital.

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