Which of the following statement is correct? All the answers are incorrect. The weighted average cost of capital (ka or WACC) is based on the costs of debt only because it is the cheapest sources of the capital. Formula for the After-Tax Cost of Debt Before Tax kd = AT kd (1 - T) where kd is the before-tax cost of debt and T is the firm's marginal tax rate. Overalli, the cost of capital is the compensation that the issuers (firms) of the bonds and stocks demand of the investors who purchase these securities, adjusted for taxes and transaction costs in certain cases. Firms raise capital by borrowing it by issuing bonds to investors or promissory notes to banks, or by issuing preferred or common stock