All else equal an increase in a companys stock price will in

All else equal, an increase in a company\'s stock price will increase the marginal cost of common stock, r_s.

Question options:

False

Typically the after-tax cost of debt financing exceeds the after-tax cost of equity financing.

Question options:

False

The WACC represents the cost of capital based on historical averages. In that sense, it does not represent the marginal cost of capital.

Question options:

False

When calculating the cost of capital, the cost of retained earnings should be zero as the company already earned it in previous periods.

Question options:

False

If a company uses CAPM to compute the cost of equity, a reduction in the market risk premium reduces a company\'s WACC.

Question options:

.

Solution

1)

FALSE

When the stock price increases, the cost of equity decreases.

2)

FALSE

After tax cost of debt is cheaper than after tax cost of equity.

3)

FALSE

WACC represents marginal cost of capital.

4)

FALSE

Retained earnings will also have a cost.

5)

TRUE.

We multiply beta with market risk premium and risk free rate to find cost of equity. When the market risk premium decraeses, cost of equity decreases.