For a company whose target capital structure calls for 50% debt and 50% common e

ID: 2783859 • Letter: F

Question

For a company whose target capital structure calls for 50% debt and 50% common equity, which of the following statements is CORRECT?

a. The WACC is calculated on a before-tax basis. b. The cost of equity is always equal to or greater than the cost of debt. c. The WACC exceeds the cost of equity. d. The interest rate used to calculate the WACC is the average after-tax cost of all the company's outstanding debt as shown on its balance sheet. e. The cost of retained earnings typically exceeds the cost of new common stock.

Explanation / Answer

anser is option b because shareholders will never accept a return which is less than debt holders when it is the equity owners who take the maximum risk ( they are paid last in case of a bankrptcy) hence it is not passible to have rate of debt highe than equity.

other opions are wrong because wacc is taken on after tax basis, wacc is less than retu on equity,,cost of retained earnings is lower and average after tax weighted cost is not taken to compute a SINGLE interest rate rather all are taken separately.

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For a company whose target capital structure calls for 50% debt and 50% common e

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