Which of the Following Statements Is CORRECT

question 65

Multiple Choice

Which of the following statements is CORRECT?

• A) The tax-adjusted cost of debt is always greater than the interest rate on debt, provided the company does in fact pay taxes.
• B) If a company assigns the same cost of capital to all of its projects regardless of each project's risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject.
• C) Because no flotation costs are required to obtain capital as reinvested earnings, the cost of reinvested earnings is generally lower than the after-tax cost of debt.
• D) Higher flotation costs tend to reduce the cost of equity capital.
• E) Since debt capital can cause a company to go bankrupt but equity capital cannot, debt is riskier than equity, and thus the after-tax cost of debt is always greater than the cost of equity.

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Definitions:

Single Firm

Refers to an individual business entity that operates in a market, typically producing goods or services.

Monopoly

A market structure in which a single seller dominates the market for a particular good or service, without any close substitutes.

Monopolistic Industry

An industry dominated by a single firm that has control over pricing and the market, facing little to no competition.

Blocked Entry

A condition in a market where barriers prevent new firms from entering, often leading to reduced competition and allowing existing firms to maintain higher prices and profits.