Which of the following statements is NOT CORRECT? The cost of capital used in ca
ID: 2790439 • Letter: W
Question
Which of the following statements is NOT CORRECT?
The cost of capital used in capital budgeting should reflect the average cost of the various types of capital a firm uses to finance the projects.
The cost of equity is a market-determined variable in the sense that it’s shareholders’ required return.
The after-tax cost of debt, which is lower than then before-tax cost, is used as the component cost of debt for purposes of developing the firm’s WACC.
The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of preferred dividends received by a corporation may be excluded from the receiving company’s taxable income.
Explanation / Answer
The last option is incorrect.
It is because dividends on preferred stock are not tax deductible just like common stock. there is no adjustment made.