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Question(s) / Instruction(s):

Which of the following statements is CORRECT?

A   When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.

B   When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation.

C    Because of tax effects, an increase in the risk-free rate will have no effect on the after-tax cost of debt than on the cost of common stock.

D    If a company’s beta increases, this will decrease the cost of equity used to calculate the WACC.

E    Higher flotation costs reduce investor returns, and that leads to a reduction in a company’s WACC.

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