Which of the following statements is correct?
A) All component costs in a firm's weighted average cost of capital must reflect after-tax costs, but the only component that requires an adjustment for taxes is the cost of new common stock.
B) An increase in the marginal corporate tax rate would lower the weighted average cost of capital for the firm, other things held constant.
C) The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt.
D) The WACC is the sum of the Fed Funds rate and the firm's bond coupon rate.

Question

Quizplus · Accepted Answer

The correct statement is B) An increase in the marginal corporate tax rate would lower the weighted average cost of capital for the firm, other things held constant. This is because the interest expense on debt is tax-deductible, which reduces the effective cost of debt for the firm and thus lowers the WACC when the tax rate increases.

Which of the Following Statements Is Correct