A company has a capital structure which consists of 50 percent debt and 50 percent equity. Which of the following statements is most correct?
A) The cost of equity financing is greater than or equal to the cost of debt financing.
B) The WACC exceeds the cost of equity financing.
C) The WACC is calculated on a before-tax basis.
D) The WACC represents the cost of capital based on historical averages. In that sense, it does not represent the marginal cost of capital.
E) The cost of retained earnings exceeds the cost of issuing new common stock.

Question

Quizplus · Accepted Answer

Generally, the cost of equity financing is higher than the cost of debt financing due to equity investors wanting a higher return to compensate for the higher risk. Therefore, the cost of equity financing is either greater than or equal to the cost of debt financing.

A Company Has a Capital Structure Which Consists of 50