Which of the following statements is CORRECT?
A) Since debt capital can cause a company to go bankrupt but equity capital cannot,debt is riskier than equity,and thus the after-tax cost of debt is always greater than the cost of equity.
B) The tax-adjusted cost of debt is always greater than the interest rate on debt,provided the company does in fact pay taxes.
C) If a company assigns the same cost of capital to all of its projects regardless of each project's risk,then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject.
D) Because no flotation costs are required to obtain capital as retained earnings,the cost of retained earnings is generally lower than the after-tax cost of debt.
E) Higher flotation costs tend to reduce the cost of equity capital.

Question

Quizplus · Accepted Answer

Assigning the same cost of capital to all projects regardless of their risk can lead to incorrect project selection. Safe projects may be rejected because they appear less profitable due to the higher cost of capital assigned to them. Similarly, risky projects may be accepted because they appear more profitable due to the lower cost of capital assigned to them. This can result in a suboptimal allocation of resources and negatively impact the company's overall performance.

Which of the Following Statements Is CORRECT