Which of the following is most correct?
A)When comparing two firms within the same industry, most analysts calculate the weighted average cost of capital on a before-tax basis to facilitate comparisons.
B)Firms should use historical costs rather than marginal costs of capital.
C)An increase in the risk-free rate will increase the cost of equity.
D)All of these statements are equally correct.

Question

Quizplus · Accepted Answer

An increase in the risk-free rate will increase the cost of equity because the risk-free rate is used as the starting point for determining the required return on equity. Choices A and B are incorrect as most analysts calculate the weighted average cost of capital on an after-tax basis to account for the tax deductibility of interest payments, and firms should use marginal costs of capital to make investment decisions.

Which of the Following Is Most Correct