Which of the following statements is NOT CORRECT? The cost of capital used in ca

Question

Which of the following statements is NOT CORRECT?     

The cost of capital used in capital budgeting should reflect the average cost of the various types of capital a firm uses to finance the projects.

The cost of equity is a market-determined variable in the sense that it’s shareholders’ required return.

The after-tax cost of debt, which is lower than then before-tax cost, is used as the component cost of debt for purposes of developing the firm’s WACC.

The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of preferred dividends received by a corporation may be excluded from the receiving company’s taxable income.

Explanation / Answer

The last option is incorrect.

It is because dividends on preferred stock are not tax deductible just like common stock. there is no adjustment made.

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