Which One of the Following Statements Is Correct? Assume the Pretax

question 98

Multiple Choice

Which one of the following statements is correct? Assume the pretax cost of debt is less than the cost of equity.

• A)A firm may change its capital structure if the government changes its tax policies.
• B)A decrease in the dividend growth rate increases the cost of equity.
• C)A decrease in the systematic risk of a firm will increase the firm's cost of capital.
• D)A decrease in a firm's debt-equity ratio will decrease the firm's cost of capital.
• E)The cost of preferred stock decreases when the tax rate increases.

---

Definitions:

Owner's Equity

Represents the owner’s claims on the assets of a business, calculated as the business’s total assets minus its total liabilities.

Accounting Equation

The fundamental equation of double-entry bookkeeping, reflecting that assets equal liabilities plus owner's equity.

Owner's Equity

Owner's equity represents the owner's stakes or claims against the assets of a business, equal to the total assets minus total liabilities.

Liabilities

Financial obligations or debts that a business or individual owes to others, which are expected to be settled over time through the transfer of economic benefits like cash or goods.