Which of the Following Statements Is CORRECT

question 79

Multiple Choice

Which of the following statements is CORRECT?

• A) The after-tax cost of debt that should be used as the component cost when calculating the WACC is the average after-tax cost of all the firm's outstanding debt.
• B) Suppose some of a publicly-traded firm's stockholders are not diversified;they hold only the one firm's stock.In this case,the CAPM approach will result in an estimated cost of equity that is too low in the sense that if it is used in capital budgeting,projects will be accepted that will reduce the firm's intrinsic value.
• C) The cost of equity is generally harder to measure than the cost of debt because there is no stated,contractual cost number on which to base the cost of equity.
• D) The bond-yield-plus-risk-premium approach is the most sophisticated and objective method for estimating a firm's cost of equity capital.
• E) The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project,i.e. ,it is the after-tax cost of debt if debt is to be used to finance the project or the cost of equity if the project will be financed with equity.

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Definitions:

Labor Force

The segment of the population that is either employed or actively seeking employment; the workforce.

Civilian Noninstitutional Population

This term refers to persons 16 years of age and older residing in the United States who are not inmates of institutions (e.g., penal and mental facilities, homes for the aged) and who are not on active duty in the Armed Forces.

Adult Population

Individuals within a society who are considered adults, typically measured by age thresholds specified by law or custom, often used in demographic analyses and policy discussions.

Unemployment Rate

The proportion of the workforce that is without a job and is actively seeking work.