Which of the following statements is correct?
A) A decrease in the firm's marginal corporate tax rate will decrease the weighted average cost of capital.
B) Flotation costs can decrease the weighted average cost of capital.
C) The cost of debt is based on the cost of all liabilities, including accounts payable and accruals.
D) None of the statements are correct.

Question

Quizplus · Accepted Answer

All the given statements are incorrect. A decrease in the firm's marginal corporate tax rate actually increases the weighted average cost of capital because the tax shield on debt becomes less valuable. Flotation costs increase the cost of raising new capital, thereby increasing the weighted average cost of capital. The cost of debt is typically based on the interest rate of long-term debt, not on all liabilities like accounts payable and accruals.

Which of the Following Statements Is Correct