Which of the Following Statements Is CORRECT

question 9

Multiple Choice

Which of the following statements is CORRECT?

• A) We should use historical measures of the component costs from prior financings that are still outstanding when estimating a company's WACC for capital budgeting purposes.
• B) The cost of new equity (r_e) could possibly be lower than the cost of reinvested earnings (r_s) if the market risk premium, risk-free rate, and the company's beta all decline by a sufficiently large amount.
• C) A firm's cost of reinvesting earnings is the rate of return stockholders require on a firm's common stock.
• D) The component cost of preferred stock is expressed as r_p(1 - T), because preferred stock dividends are treated as fixed charges, similar to the treatment of interest on debt.
• E) In the WACC calculation, we must adjust the cost of preferred stock (the market yield) to reflect the fact that 70% of the dividends received by corporate investors are excluded from their taxable income.

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