Question

Question 13 (1 point) Which of the following statements is correct? A) When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation. B) When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible for the corporation. OC) If a company's beta increases, this will increase the cost of equity, but never its WACC. D) Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock.

Answer 1

Option B is correct. While calculating the cost of debt, company should consider adjusting taxes because interest payments are tax deductable

==>preferred stock dividends are not tax deductable, hence we should not adjust for taxes.

==>If a company's beta increases its cost of equity increases and its WACC also increases

==>risk free rate will not affect the cost of debt but cost of common stock changes with that because the formula of cost of common stock=risk free rate+(beta*market risk premium)

Answer 2

Part b is. Ansr