Which of the following statements is CORRECT? Assume a company's target capital structure is 50% debt and 50% common equity.
A) The WACC is calculated on a before-tax basis.
B) The WACC exceeds the cost of equity.
C) The cost of equity is always equal to or greater than the cost of debt.
D) The cost of reinvested earnings typically exceeds the cost of new common stock.
E) 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.

Question

Quizplus · Accepted Answer

The cost of equity is always equal to or greater than the cost of debt. This is because common shareholders have a residual claim on the company's earnings and assets, and therefore require a higher return on their investment to compensate for the greater risk compared to bondholders.

Which of the Following Statements Is CORRECT? Assume a Company's