Question

The correct "cost" for each component of capital is: c) The current dividend rate for preferred and common stock and the after-tax cost of the current yield-to-maturity for debt a) The current dividend rate for common and preferred stock and the coupon interest rate for debt b) The market's required rate of return for preferred stock, common stock and debt, each of which is further reduced by the tax rate d) The market's required return for preferred and common stock and the after- tax cost of the current yield-to-maturity for debt

Answer 1

Answer is Last Option

WACC is calculated using the market value and cost of the respective components of capital. Cost of debt or its YTM is however used on a post tax basis, as interest expense on debt is tax deductible.