Which of the following statements is most correct?
A) The weighted average cost of capital for a given capital budget level is a weighted average of the marginal cost of each relevant capital component which makes up the firm's target capital structure.
B) The weighted average cost of capital is calculated on a before-tax basis.
C) An increase in the risk-free rate is likely to increase the marginal costs of both debt and equity financing.
D) Answers a and c are correct.
E) All of the answers above are correct.

Question

Quizplus · Accepted Answer

Option A accurately describes the calculation of weighted average cost of capital (WACC) as it takes into account the marginal cost of each relevant capital component. Option B is incorrect as WACC is calculated on an after-tax basis. Option C is true, as an increase in the risk-free rate leads to an increase in the cost of debt, and as a result, the marginal cost of equity also increases due to the higher required return of investors. Option E is incorrect as option B is incorrect. Therefore, the correct option is D, as options A and C are both correct.

Which of the Following Statements Is Most Correct