Which of the following statements is most correct?
A) The weighted average cost of capital for a given capital budget level is a weighted average of the marginal cost of each relevant component that makes up the firm's target capital structure.
B) The weighted average cost of capital is calculated on a before-tax basis.
C) An increase in the risk-free rate is likely to increase the marginal cost of both debt and equity financing.
D) Answers a and c are both correct.
E) All of the above answers are correct.

Question

Quizplus · Accepted Answer

Option A is correct because the weighted average cost of capital (WACC) is the weighted average of the costs of all capital components (i.e., debt, preferred stock, and equity) that make up a firm's capital structure.

Option C is also correct because an increase in the risk-free rate will increase the cost of debt and equity financing. This is because a higher risk-free rate translates to a higher cost of capital for all types of investors.

Option B is incorrect because the WACC is typically calculated on an after-tax basis. However, since Option E is not correct and Option B is the only incorrect statement, we can eliminate Option E and conclude that the correct answer is Option D.

Which of the Following Statements Is Most Correct