All of the following statements are correct except:
A)Relevant cash flows are incremental after-tax cash flows, which must be discounted using an incremental after-tax cost of capital.
B)The firm's relevant cost of capital is computed from after-tax financing costs.
C)A project's incremental cash flows must be discounted at a cost of capital that represents the incremental or marginal cost to the firm of financing the project, that is, the cost of raising one additional dollar of capital.
D)In estimating the cost of capital, the firm's analysts need to evaluate investors' expected returns under likely market conditions and then use these expected returns to compute the firm's marginal future cost of raising funds.
E)All of the above statements are correct.

Question

Quizplus · Accepted Answer

Statement E is incorrect because not all the statements are correct. Specifically, statement B is misleading as the firm's relevant cost of capital is typically based on the weighted average cost of capital (WACC), which considers both equity and debt, not just after-tax financing costs.

All of the Following Statements Are Correct Except