Which of the following statements is MOST correct? A. Because the cost of debt is lower than the cost of equity, value-maximizing firms maintain debt ratios of close to 100%. B. Corporations that are 100% equity financed will have a much lower weighted average cost of capital because the lack of debt lowers their risk of bankruptcy. C. The source of capital with the lowest after-tax cost is preferred stock, because it is a hybrid security, part debt and part equity. D. The cost of a particular source of capital is equal to the investor's required rate of return after adjusting for the effects of both flotation costs and corporate taxes.

Question

Deborah Villegas

Business

3 July, 17:51

Which of the following statements is MOST correct? A. Because the cost of debt is lower than the cost of equity, value-maximizing firms maintain debt ratios of close to 100%. B. Corporations that are 100% equity financed will have a much lower weighted average cost of capital because the lack of debt lowers their risk of bankruptcy. C. The source of capital with the lowest after-tax cost is preferred stock, because it is a hybrid security, part debt and part equity. D. The cost of a particular source of capital is equal to the investor's required rate of return after adjusting for the effects of both flotation costs and corporate taxes.

+1

Answers (1)

Know the Answer?

Jesus · Answer 1

B. Corporations that are 100% equity financed will have a much lower weighted average cost of capital because the lack of debt lowers their risk of bankruptcy.