Which of the following is CORRECT? a. a change in a company\'s target capital st

ID: 2651685 • Letter: W

Question

Which of the following is CORRECT?

a. a change in a company's target capital structure cannot affect its WACC

b. WACC calculations should be based on the before-tax costs of all the individual capital components

c. Flotation costs associated with issuing new common stock normally reduce the WACC

d. If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline

e. an increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing

Answer:

Option d is correct, If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline,

Reason: With the increase in tax, the cost of debt will decrease which will decrease the WACC.

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