"Corporate Finance": Tax adjustment

来源: 正保会计网校编辑：小鞠橘桔 2020/10/29 09:45:01　字体：大小

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Questions 1:

The cost of which source of capital most likely requires adjustment for taxes in the calculation of a firm’s weighted average cost of capital?

A、 Common stock

B 、Preferred stock

C、 Bonds

Questions 2:

The optimal capital budget for a firm is best described as occurring when the company’s marginal cost of capital is:

A 、equal to the investment opportunity schedule.

B、 less than the investment opportunity schedule.

C、 greater than the investment opportunity schedule.

View answer resolution

【Answer to question 1】C

【analysis】

C is correct. Bonds are a form of debt that must be adjusted for taxes when calculating the weighted average cost of capital.

A is incorrect because adjustment for taxes is applicable for the cost of debt and not in the cost of equity.

B is incorrect because adjustment for taxes is applicable for the cost of debt and not in the cost of equity.

【Answer to question 2】A

【analysis】

A is correct. The optimal capital budget occurs when the marginal cost of capital (MCC) intersects with (is equal to) the investment opportunity schedule (IOS).

B is incorrect. The optimal capital budget occurs when the marginal cost of capital (MCC) intersects with (is equal to) the investment opportunity schedule (IOS).

C is incorrect. The optimal capital budget occurs when the marginal cost of capital (MCC) intersects with (is equal to) the investment opportunity schedule (IOS).

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