A Company Whose Target Capital Structure Calls for 50% Debt

question 64

Multiple Choice

a company whose target capital structure calls for 50% debt and 50% common equity, which of the following statements is CORRECT?

• A)The interest rate used to calculate the WACC is the average after-tax cost of all the company's outstanding debt as shown on its balance sheet.
• B)The WACC is calculated on a before-tax basis.
• C)The WACC exceeds the cost of equity.
• D)The cost of equity is always equal to or greater than the cost of debt.
• E)The cost of retained earnings typically exceeds the cost of new common stock.

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Definitions:

Eurocurrency Deposits

Time deposits held in banks outside their country of origin but denominated in the currency of the country of origin, often used for international transactions.

Lending Rate

Lending Rate is the interest rate charged by banks on loans extended to clients, reflecting the cost of borrowing money.

Domestic Money Market

A section of the financial market where domestic short-term borrowing and lending of funds occur.

Forward Market

A financial market in which participants can enter into contracts to buy or sell assets at a specified future date and price.