8. Which of the following statements is true of marginal cost of capital? a. All

Question

8. Which of the following statements is true of marginal cost of capital? a. All else equal, an increase in the tax rate would decrease the marginal cost of debt b. All else equal, an increase in a company's stock price will increase the marginal cost c. All else equal, an increase in a company's stock price will increase the marginal cost d. All else equal, an increase in the capital raised in a period will decrease the marginal e. All else equal, an increase in the weighted cost of capital will decrease the marginal capital. of retained earnings of issuing new common equity cost of debt capital. cost of retained capital.

Explanation / Answer

Answer Correct answer is A, Increase in tax rate will decrease marginal cost of capital. The interest on debt financing is a deduction to arrive at taxable income. Taking the tax-deductibility of interest as the base case, adjust the pre-tax cost of debt for this tax shield. Multiplying Cost of Debt by (1 t) results in an estimate of the after-tax cost of debt. Therefore

Marginal cost of debt=cost of debt ×Weight of Debt × (1-Tax rate)

Increase in Tax rate will decrease Marginal cost of debt

B is Incorrect since increase in stock price will decrease marginal cost of retained earning

C is Incorrect since increase in stock price will decrease marginal cost of Equity

D is Incorrect since increase in capital will not decrease cost of debt capital either it will remain same or it will increase

E is Incorrect since increase in Weighted cost of capital will increase marginal cost of retained capital as it will be difficult to raise equity capital

Related Questions

Navigate

• Browse (All)
• Browse 8
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.