Which of the following statements is CORRECT? a. An increase in the risk-free ra

Question

Which of the following statements is CORRECT?

a. An increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing. b. WACC calculations should be based on the before-tax costs of all the individual capital components. c. If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline. d. Flotation costs associated with issuing new common stock normally reduce the WACC. e. A change in a company's target capital structure cannot affect its WACC.

Explanation / Answer

If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline.

WACC is given by = Re*E + Rd *D(1-t)

T= tax rate

So of the yax rate increase wacc will decline

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