Which of the following statements is MOST correct?
A) Because the cost of debt is lower than the cost of equity, value-maximizing firms maintain debt ratios of close to 100%.
B) Corporations that are 100% equity financed will have a much lower weighted average cost of capital because the lack of debt lowers their risk of bankruptcy.
C) The source of capital with the lowest after-tax cost is preferred stock, because it is a hybrid security, part debt and part equity.
D) The cost of a particular source of capital is equal to the investor's required rate of return after adjusting for the effects of both flotation costs and corporate taxes.

Question

Quizplus · Accepted Answer

The cost of a particular source of capital is equal to the investor's required rate of return after adjusting for the effects of both flotation costs and corporate taxes. This is because both of these factors affect the effective return that investors receive. Choices A, B, and C are all incorrect as they contain factual errors.

Which of the Following Statements Is MOST Correct