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

Question

Quizplus · Accepted Answer

The correct statement is C because it acknowledges that reinvested earnings have an opportunity cost associated with them, which is the return that could have been earned if those earnings were invested elsewhere. This concept is fundamental in finance, recognizing that using internal funds for investment still incurs a cost, contrary to the notion that such funds are "free."

Which of the Following Statements Is CORRECT