Which of the Following Statements Is CORRECT

question 13

Multiple Choice

Which of the following statements is CORRECT?

• A) A cost should be assigned to reinvested earnings due to the opportunity cost principle, which refers to the fact that the firm's stockholders would themselves expect to earn a return on earnings that were distributed rather than retained and reinvested.
• B) No cost should be assigned to reinvested earnings because the firm does not have to pay anything to raise them. They are generated as cash flows by operating assets that were raised in the past; hence, they are "free."
• C) Suppose a firm has been losing money and thus is not paying taxes, and this situation is expected to persist into the foreseeable future. In this case, the firm's before-tax and after-tax costs of debt for purposes of calculating the WACC will both be equal to the interest rate on the firm's currently outstanding debt, provided that debt was issued during the past 5 years.
• D) If a firm has enough reinvested earnings to fund its capital budget for the coming year, then there is no need to estimate either a cost of equity or a WACC.
• E) The component cost of preferred stock is expressed as r_p(1 - T). This follows because preferred stock dividends are treated as fixed charges, and as such they can be deducted by the issuer for tax purposes.

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Definitions:

Nutrition

The process by which living organisms obtain and utilize food and nutrients for energy, growth, and maintenance.

Metabolic Processes

A series of chemical reactions in a living organism that enable it to maintain life, involving the production and utilization of energy.

Inorganic Substances

Materials that do not contain carbon-hydrogen bonds, typically including minerals, metals, and other compounds that are not classified as organic.

Body Tissues

Groups of cells that perform specific functions and are structured together to form various parts of the human body.