Which of the following statements about the cost of capital is incorrect?
A) A company's target capital structure affects its weighted average cost of capital.
B) Weighted average cost of capital calculations should be based on the after-tax-costs of all the individual capital components.
C) If a company's tax rate increases, then, all else equal, its weighted average cost of capital will increase.
D) The cost of retained earnings is equal to the return stockholders could earn on alternative investments of equal risk.
E) Flotation costs can increase the cost of preferred stock.

Question

Quizplus · Accepted Answer

If a company's tax rate increases, its cost of debt financing will decrease as the interest paid on its debt becomes tax-deductible. This will lead to a decrease in the company's weighted average cost of capital, not an increase.

Which of the Following Statements About the Cost of Capital