Old Exam Questions - Cost of Capital Page 4 of 27 Pages issue of common stock will be equal to the investors’ required rate of return for that same issue. B. The WACC represents the historical cost of capital and is usually calculated on a before-tax basis. C. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are tax deductible. D. Since the money is readily available, the cost of retained earnings is usually a lot cheaper than the cost of debt financing. E. When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred stock dividends are tax deductible. 5. Select the statement that is most correct. A. When a bond’s coupon rate is greater than its yield to maturity, the coupon rate should be used as the firm’s before-tax cost of debt. B. All other things equal (including component costs), a higher tax rate will lower a firm’s WACC only if the firm uses debt financing.
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