2. The weighted average cost of capital The importance of knowing a firm's cost of capital Purple Lemon Fruit Company has two divisions: one is very risky, and the other exhibits significantly less risk. The company uses its investors' overall required rate of return to evaluate its investment projects. It is most likely that the firm will become: O Riskier over time, and its value will increase O Riskier over time, and its value will decrease O Less risky over time, and its value will decrease O Less risky over time, and its value will increase Which of the following statements is correct? O The cost of raising funds from retained earnings is usually a lot cheaper than the cost of debt financing, because the firm already possesses the funds in retained earnings. O A company needs to adjust the cost of debt for taxes, because interest payments are tax deductible. O A firm's after-tax cost of preferred stock may be significantly less than its before-tax cost, because issuing preferred stock dividends creates a tax shelter