Which of the Following Statements Is CORRECT

question 18

Multiple Choice

Which of the following statements is CORRECT?

• A) When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation.
• B) Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM.
• C) If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough reinvested earnings to take care of its equity financing and hence must issue new stock.
• D) Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC.
• E) When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.

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Definitions:

Stated Value

The nominal value assigned by a corporation to its issued shares, which might not reflect the market value but is used for internal accounting.

Paid-In Capital

The sum of money contributed by investors through the issuance of common or preferred stocks, counting both the share's nominal value and any excess over that nominal value.

Treasury Stock

Shares of a company's own stock that it has reacquired from shareholders but not retired, held in the company's treasury.

Net Income

Represents the amount of money that remains from revenues after all the firm's expenses, taxes, and costs are subtracted over a specific period.