FIN 3104 Cost of Capital - more

T/F "when investors increase their required rate of return, the cost of capital drops simultaneously"

False

T/F "it is not necessary to adjust the cost of common stock for taxes since basis since dividends paid to common stockholders are not tax-deductible"

True

T/F "it is not necessary to adjust the cost of preferred stock for taxes since preferred stock dividends are not tax-deductible"

True

T/F "when the tax rate increases, there is an increased incentive to use more debt financing"

True

T/F "if the before-tax cost of debt is 12% and the firm has a 40% marginal tax rate, the after-tax cost of deb is 7.2%"

True 12*(1-0.40) = 7.2

one reason the cost of capital for bonds is less than the cost of capital for common stock because

bondholders bear less risk than common stockholders bear

for a firm to maximize its firm value, it should invest in new projects when cash flows from the new project, discounted at the firm's __________, result in a positive NPV.

cost of capital

when estimating the weighted average cost of capital WACC, which of the following is impacted by the firm's tax rate?

cost of debt

which of the following must be adjusted for taxes when calculating the weighted average cost of capital?

debt

the cost of preferred stock is equal to:

the preferred stock dividend divided by the net proceeds per preferred share

the firm's cost of capital is:

the rate of return that must be earned on its investments in order to satisfy the firm's investors