Which of the following is most correct?
A) When comparing two firms within the same industry, most analysts calculate the weighted average cost of capital on a before-tax basis to facilitate comparisons.
B) Firms should use historical costs rather than marginal costs of capital.
C) An increase in the risk-free rate will increase the cost of equity.
D) All of the statements are equally correct.

Question

Quizplus · Accepted Answer

An increase in the risk-free rate will increase the cost of equity. This is because the risk-free rate is used as the basis for determining the cost of equity, which is one component of the weighted average cost of capital (WACC). The WACC is used to evaluate the overall cost of capital for a firm, taking into account the cost of both debt and equity financing. Option A may be true, but it is not always the case. Option B is incorrect because firms should use marginal costs of capital, which reflect the current cost of raising additional funds, rather than historical costs that may not be relevant. Option D is incorrect because not all statements are equally correct.

Which of the Following Is Most Correct