Which of the following statements concerning the effect of taxes on a firm's cost of capital is correct?
A. All else equal, an increase in the corporate tax rate will result in a decrease in the firm's weighted average cost of capital.
B. For a particular firm, the before-tax cost of debt is less than the after-tax cost of debt because the firm must pay taxes on the interest its bondholders receive.
C. A firm's after-tax cost of debt is always greater than its cost of retained earnings.
D. Because preferred stock dividends are tax deductible to the firm, its cost of preferred stock is greater than its before-tax cost of debt.
E. All else equal, a firm's cost of retained earnings is less than its cost of new common equity because any earnings retained by the firm are not double taxed (i.e., taxed twice) like the dividends that are paid to new common stockholders.
Answer: A
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