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Cost of capital

Which of the following statements is most correct?

a. In the weighted average cost of capital calculation, we must adjust the cost of preferred stock for the tax exclusion of 70 percent of dividend income.

b. We ideally would like to use historical measures of the component costs from prior financings in estimating the appropriate weighted average cost of capital.

c. The cost of common stock (rs) will increase if the market risk premium and risk-free rate decline by a substantial amount.

d. Statements b and c are correct.

e. None of the statements above is correct.

Solution Preview

a. In the weighted average cost of capital calculation, we must adjust the cost of preferred stock for the tax exclusion of 70 percent of dividend income.

We do not adjust since this is applicable to be investor and not to the ...

Solution Summary

The solution explains the correct statement among the given statements relating to cost of capital

$2.19