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.

Question

Quizplus · Accepted Answer

C) If a company's tax rate increases, then, all else equal, its weighted average cost of capital (WACC) will decline. This is because the cost of debt is tax-deductible, so an increase in the tax rate reduces the after-tax cost of debt, which in turn can lower the WACC assuming the proportion of debt financing in the capital structure remains significant.

Which of the Following Statements Is CORRECT