Which of the Following Statements Is CORRECT

question 8

Multiple Choice

Which of the following statements is CORRECT?

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

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Definitions:

Ceteris Paribus

A Latin term meaning “other things constant” that is used when the effect of one change is being described, recognizing that if other things changed, they also could affect the result. Economists often describe the effects of one change, knowing that in the real world, other things might change and also exert an effect.

Consumer Surplus

The difference between the maximum price a consumer is willing to pay for a good and the actual market price they pay.

Marginal Benefit

The additional satisfaction or utility that a person receives from consuming one more unit of a good or service.

Total Utility

The overall level of satisfaction or fulfillment a consumer receives from consuming a specific quantity of a good or service.