Which of the Following Statements Is CORRECT

question 3

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 company must try to adjust its current actual market value weights toward its target weights.
• 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 50% of the dividends received by corporate investors are excluded from their taxable income.

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Definitions:

Gross Domestic Product

Gross Domestic Product (GDP) is the total market value of all goods and services produced within a country in a specific period, serving as a broad indicator of economic health.

Cultural Values

The core principles and ideals upon which an entire community exists and makes decisions, deeply influencing consumer behavior and preferences.

Shared Ideas

Concepts, thoughts, or innovations communicated between individuals or groups leading to collective understanding or development.

Consumption

The action or process of using up goods and services, typically by individuals or households.