Which of the following circumstances would invalidate the constant cost of capital assumption?

Question

Quizplus · Accepted Answer

The constant cost of capital assumption assumes that the cost of capital (WACC) stays constant over the life of the project. If the firm knows that its marginal tax rate will change in the future, this assumption is no longer valid and the cost of capital will change over time. Therefore, option B would invalidate the constant cost of capital assumption. Financing with debt (option A) or retained earnings (option C) would not necessarily invalidate the assumption, as the cost of debt and cost of equity may still remain constant. The volatility of the company's shares (option D) may affect the market risk premium, but it does not necessarily invalidate the constant cost of capital assumption.

Which of the Following Circumstances Would Invalidate the Constant Cost