Which of the following statements regarding the weighted average cost of capital

Question

Which of the following statements regarding the weighted average cost of capital (WACC) are correct? Check all statements that apply The WACC represents the cost of all the capital that the firm has already raised to acquire its assets. The WACC used to evaluate capital budgeting projects Is a marginal, after-tax cost of capital The WACC used to evaluate capital budgeting projects is a historical, before-tax cost of capital, Retained earnings are not costless because they ha-re an opportunity cost. The cost of preferred stock is not adjusted for flotation costs. The cost ct preferred stock is not adjusted for taxes. Target capita' structure changes do not affect the WACC, only changes to the component costs themselves So Suppose a fm. has used capita n the pan with debt,

Explanation / Answer

1.

Statements correct regarding the weighted average cost of capital are:

a. The WACC represents the cost of all the capital that the firm has already raised to acquire its assets.

b. The WACC used to evaluate capital budgeting projects is a marginal, after-tax cost of capital.

2.

Following sources of capital are relevant when calculating the firm’s WACC:

i. Debt

ii. Preferred Stock

(because both’s costs are calculated after tax)

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