Which of the Following Statements Is Correct

question 3

Multiple Choice

Which of the following statements is correct?

• A)Capital components are the types of capital used by firms to raise money.All capital comes from one of three components: long-term debt, preferred stock, and equity.
• B)Preferred stock does not involve any adjustment for flotation cost since the dividend and price are fixed.
• C)The cost of debt used in calculating the WACC is an average of the after-tax cost of new debt and of outstanding debt.
• D)The opportunity cost principle implies that if the firm cannot invest retained earnings and earn at least rs, it should pay these funds to its stockholders and let them invest directly in other assets that do provide this return.
• E)The cost of new common equity includes an adjustment for flotation costs which is expressed as a fixed percentage of the current stock price.The flotation percentage is determined jointly by the current price of the firm's stock and its growth rate.

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Definitions:

Adjusting Entry

A journal entry made in the accounting records to update the balances of certain accounts and accurately reflect the financial position before preparing financial statements.

Bad Debt Expense

An expense reported on the income statement, reflecting the cost of accounts receivable that are not expected to be collected.

Allowance Method

An accounting technique used to estimate uncollectible accounts receivable and adjust for bad debts.

Direct Write-Off Method

An accounting practice that involves directly writing off an outstanding receivable if deemed uncollectible, impacting earnings directly.