With respect to issues related to the cost of capital A An i

With respect to issues related to the cost of capital:

A. An increase in the debt ratio will result in greater risk for debt holders but not equity holders.

B. The cost of capital is the return a firm must earn before tax to satisfy security holders.

C. The WACC is the correct discount rate for average-risk projects.

D. The expected return on equity is relevant to capital budgeting decisions.

Solution

WACC = Wd×Rd×(1-t)+We×Ke+Wp×Rp

W is weights of respective portfolios

R is return on respective portfolios

Wd+We+Wp = 1

WACC is the weighted average cost of capital. It considers all the sources weights, in their market weights. So it is most suitable for evaluating project.

Hence, correct option is C. The WACC is the correct discount rate for average-risk projects.