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Question Completion Status: Moving to another question will save this response. Question 13 of 5 Question 13 1 points Which one of the following statements is correct concerning the weighted average cost of capital (WACC)? A firm's WACC will decrease as their corporate tax rate decreases The weight of the debt can be based on the face value of the bond issue(s) outstanding multiplied by the quoted price(s) when expressed as a Ob.%age of the face value o. The pre-tax rate of return on the debt is the rate that is relevant to the computation of the WACC. When computing the WACC, the weight assigned to the preferred stock is equal to the coupon rate multiplied by the par value assigned to the d. preferred stock. The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book e value per share. Moving to another question will save this response Question 13 of 55 MacBook Air 80 DOO FB * I 3 $ 4 % 5 & 7 6 8 9 0

Answer 1

Out of the given statements , the statement which is correct is :-

(b) the weight of the debt can be based on the face value of bond issue multiplied by quoted price when expressed as a percentage of the face value .

Explanation :- For calculation of WACC , one needs weight of debt which is calculated by dividing value of debt by total capital . Value of debt is calculated by multiplying face value of bond with the quoted price . For example :- If face value of bond is $1000 and quoted price is 105 % so, price of bond is $1050 which is used in calculating weight of debt .

Explanation for rejection of other points :-

(a) is wrong as firm's WACC will increase with the decrease in tax rate because when tax rate will reduce , it will increase after tax cost of debt which will increase WACC .

(c) for calculation of WACC , after rax rate of return on debt is used so, (c) is also wrong .

(d) the weight on preferred stock is calculated by dividing the market value of preferred stock by total capital . So, (d) is also wrong .

(e) weight of common stock is calculated by multiplying market value per share with the no. if shares outstanding for computation of WACC. So, (e)is also wrong .