Which of the following statements is CORRECT? Answer Because of tax effects, an

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Which of the following statements is CORRECT? Answer Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock. When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation. If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company has does not have enough retained earnings to take care of its equity financing and hence needs to issue new stock. Higher flotation costs reduce investor returns, and that leads to a reduction in a company's WACC.

Explanation / Answer

1. Which of the following statements is CORRECT? answer When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.

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