Which of the following statements is CORRECT?
A) The WACC is calculated using before-tax costs for all components.
B) The after-tax cost of debt usually exceeds the after-tax cost of equity.
C) For a given firm,the after-tax cost of debt is always more expensive than the after-tax cost of non-convertible preferred stock.
D) Retained earnings that were generated in the past and are reported on the firm's balance sheet are available to finance the firm's capital budget during the coming year.
E) The WACC that should be used in capital budgeting is the firm's marginal,after-tax cost of capital.

Question

Quizplus · Accepted Answer

The WACC that should be used in capital budgeting is the firm's marginal, after-tax cost of capital. This is because the WACC is the minimum rate of return needed to create value for shareholders, and it represents the cost of raising additional capital for new projects. Therefore, the WACC should reflect the cost of the last dollar of capital raised, which is the marginal cost of capital.

Which of the Following Statements Is CORRECT