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 these choices are correct.

Question

Quizplus · Accepted Answer

An increase in the risk-free rate generally leads to an increase in the cost of equity. This is because the risk-free rate is a component of the cost of equity models, such as the Capital Asset Pricing Model (CAPM), where it represents the return expected from a risk-free investment. An increase in this rate raises the expected return from risk-free investments, thereby increasing the required return on risky investments like equity to compensate for their additional risk.

Which of the Following Is Most Correct