Which of the following statements is CORRECT? (Hint: Take a look at the WACC equation and the equations for the component costs of capital. It should become much clearer to you.)
A. All else equal, an increase in a company’s stock price will increase its marginal cost of new common equity, re.
B. If a company’s tax rate increases but the YTM of its noncallable bonds remains the same, the after-tax cost of its debt will fall.
C. When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred stock dividends are tax deductible.
D. All else equal, an increase in a company’s stock price will increase its marginal cost of retained earnings, rs.
E. Since the money is readily available, the after-tax cost of retained earnings is usually much lower than the after-tax cost of debt.