Which of the Following Statements Is CORRECT

question 63

Multiple Choice

Which of the following statements is CORRECT?

• A) The WACC is calculated using a before-tax cost for debt that is equal to the interest rate that must be paid on new debt, along with the after-tax costs for common stock and for preferred stock if it is used.
• B) An increase in the risk-free rate is likely to reduce the marginal costs of both debt and equity.
• C) The WACC for a firm that pays dividends and regularly issues new equity will be greater than the WACC for an otherwise identical company that pays lower dividends and that rarely issues new equity.
• D) Beta measures market risk, which is generally the most relevant risk measure for a publicly-owned firm that seeks to maximize its intrinsic value.However, this is not true unless all of the firm's stockholders are well diversified.
• E) The bond-yield-plus-risk-premium approach to estimating the cost of common equity involves adding a risk premium to the interest rate on the company's own long-term bonds.The size of the risk premium for bonds with different ratings is published daily in The Wall Street Journal.

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Definitions:

Total Revenue

The total income that a company receives from its normal business activities, usually from the sale of goods and services to customers.

Inelastic Demand

A situation where the quantity demanded of a good or service changes little when its price changes.

Elastic Demand

A situation where the demand for a good or service significantly changes in response to changes in price.

Income Elastic

Describes a good or service for which demand changes significantly when consumer incomes change, indicating a strong connection between income level and purchasing behavior.