General Studies · Cost of Capital

Evaluate the validity of the following statements regarding corporate finance: Statement 1: The concept of cost of capital is essentially the minimum rate of return that a firm must earn on its investments to maintain its market value and satisfy its providers of funds, serving as a crucial benchmark in capital budgeting. Statement 2: When calculating the weighted average cost of capital (WACC), the weights should ideally be based on the market values of the different components of capital rather than their book values, as market values reflect current opportunity costs. Statement 3: An increase in the corporate tax rate serves to decrease the WACC because the value of the interest tax shield increases as the tax rate rises, thereby lowering the effective after-tax cost of debt.