Which of the following statements is incorrect? O The proportions of debt and equity used to determine the weighted average cost of capital for a firm is based on the market value of debt and equity outstanding. O The main difference between the finance balance sheet and the accounting balance sheet is that the finance balance sheet is based on market values rather than book values. O The characteristics of preferred stock allow us to use the perpetuity model to estimate the cost of preferred equity. If the risk of an individual project differs from the average risk of the firm, the firm's overall cost of capital is the ideal discount rate to use when evaluating that project. All the answers are correct except one.

Which of the following statements is incorrect? The proportions of debt and equity used to determine the weighted average cost of capital for a firm is based on the market value of debt and equity outstanding. The main difference between the finance balance sheet and the accounting balance sheet is that the finance balance sheet is based on market values rather than book values. The characteristics of preferred stock allow us to use the perpetuity model to estimate the cost of preferred equity. If the risk of an individual project differs from the average risk of the firm, the firm's overall cost of capital is the ideal discount rate to use when evaluating that project. All the answers are correct except one. Which of the following statements is correct? The after-tax cost of equity (common or preferred) does not have to be adjusted by the marginal income tax rate for the firm. The cost of debt for a firm is a weighted average of the costs of the different types of equity financing used by the firm. If one observes the market quoted price of a debt security where the expected cash flows of that security are known, then one should use the book value of that security to the firm. All the answers are correct. Interest rate (or historical interest rate determined when the debt was issued) that the firm is paying on its outstanding debt reflects its current cost of debt