Question

Which one of the following statements is INCORRECT concerning the equity component of the WACC?

Answer 1

Answer:

D. There is a tax shield on the dividends paid

Explanation:

WACC is the weighted average cost of capital.

A. The equity component of WACC reflects the return expected by the company’s shareholders - CORRECT

The weighted average cost of capital formula has equity and cost of equity. The latter is the shareholder's required return.

B. Market values should be used in calculating WACC - CORRECT

Market values(and not Book values) of common equity, preferred shares, and debt are used in calculation os WACC.

C. Preferred equity is a separate component of WACC - CORRECT

If a company uses preferred equity in its capital structure, then it is included in the calculation of its WACC.

D. There is a tax shield on the dividends paid -INCORRECT

Tax shield only applies to interest rates paid on debt.