Which of the following statements regarding calculating a firm's cost of capital is correct?

Question

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If a company's beta increases, this will increase the cost of capital. This is because the beta measures the stock's volatility or risk compared to the broader market, and investors require higher returns for higher risk investments. Option A is incorrect because the after-tax cost of debt is generally lower than the after-tax cost of preferred stock. Option B is incorrect because the cost of equity (including retained earnings) is typically higher than the cost of debt. Option D is incorrect because the choice of averaging method depends on the specific circumstances of the firm, not general economic conditions.

Which of the Following Statements Regarding Calculating a Firm's Cost