For a company whose target capital structure calls for 50% debt and 50% common equity,which of the following statements is CORRECT?
A) The interest rate used to calculate the WACC is the average after-tax cost of all the company's outstanding debt as shown on its balance sheet.
B) The WACC is calculated on a before-tax basis.
C) The WACC exceeds the cost of equity.
D) The cost of equity is always equal to or greater than the cost of debt.
E) The cost of retained earnings typically exceeds the cost of new common stock.

Question

Quizplus · Accepted Answer

Statement d is true,because equity is more risky than debt and hence investors require a higher return on equity.Also,interest on debt is deductible,and this further reduces the cost of debt.The other statements are false.

For a Company Whose Target Capital Structure Calls for 50