Which of the following statements is CORRECT?
A) the after-tax cost of debt usually exceeds the after-tax cost of equity.
B) for a given firm, the after-tax cost of debt is always more expensive than the after-tax cost of non-convertible preferred stock.
C) retained earnings that were generated in the past and are reported on the firm's balance sheet are available to finance the firm's capital budget during the coming year.
D) the wacc that should be used in capital budgeting is the firm's marginal, after-tax cost of capital.
E) the wacc is calculated using before-tax costs for all components.

Question

Quizplus · Accepted Answer

The WACC used in capital budgeting should be the firm's marginal, after-tax cost of capital because it represents the cost of raising one additional dollar of capital. Retained earnings are not considered in the WACC calculation, and the after-tax cost of debt may not always exceed the after-tax cost of equity or non-convertible preferred stock. The WACC is calculated using both before-tax and after-tax costs for the components of capital.

Which of the Following Statements Is CORRECT