Which of the following statements is CORRECT?
A) The WACC as used in capital budgeting is an estimate of a company's before-tax cost of capital.
B) The percentage flotation cost associated with issuing new common equity is typically smaller than the flotation cost for new debt.
C) The WACC as used in capital budgeting is an estimate of the cost of all the capital a company has raised to acquire its assets.
D) There is an "opportunity cost" associated with using retained earnings,hence they are not "free."
E) The WACC as used in capital budgeting would be simply the before-tax cost of debt if the firm plans to use only debt to finance its capital budget during the coming year.

Question

Quizplus · Accepted Answer

Retained earnings have an opportunity cost associated with them because they could have been paid out as dividends or used for alternative investments. This means that using retained earnings is not free, and should be factored into the cost of capital calculation.

Which of the Following Statements Is CORRECT