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:

Default Risk

The risk associated with a borrower failing to make required payments on debt.

Liquidity Risk

The risk that an entity will not be able to meet its financial obligations as they come due because it cannot convert assets to cash quickly.

Deferred Consumption Risk

The risk associated with postponing consumption today in order to invest, with the potential of not having enough resources in the future.

Liquidity Risk

The risk that an entity will not be able to meet its short-term financial obligations due to the inability to quickly convert assets to cash without significant loss.