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 these choices are correct.

Question

Quizplus · Accepted Answer

The correct answer is D because: A) A decrease in the firm's marginal corporate tax rate actually increases the weighted average cost of capital since the tax shield on debt becomes less valuable. B) Flotation costs, which are the costs associated with issuing new securities, increase the cost of capital, not decrease it. C) The cost of debt is typically based on the interest rate paid on the firm's debt, not on all liabilities like accounts payable and accruals, which do not bear interest in the same way.

Which of the Following Statements Is Correct