Old Exam Questions - Cost of Capital Page 5 of 27 Pages should decrease. B. If the beta of a company’s equity decreases, then, even when flotation costs have been accounted for, it is possible for a company to achieve a lower WACC by issuing new shares of common stock to meet its equity needs, rather than relying upon retained earnings to meet those needs. C. Typically, the before-tax cost of debt financing exceeds the after-tax cost of equity financing. D. Since the firm retains any earnings that are not needed to be paid out as dividends, the cost of retained earnings is usually much cheaper that the cost of debt financing. E. All of the statements above are incorrect. 8. Which of the following statements is correct(most correct)? A. Since there are no flotation costs associated with it, the cost of retained earnings will always be less than the after-tax cost of debt financing. B. When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred stock dividends are tax deductible for the issuing firm.
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