Which of the Following Statements Is CORRECT

question 26

Multiple Choice

Which of the following statements is CORRECT?

• A)The component cost of preferred stock is expressed as rp(1 - T).This follows because preferred stock dividends are treated as fixed charges, and as such they can be deducted by the issuer for tax purposes.
• B)A cost should be assigned to retained earnings due to the opportunity cost principle, which refers to the fact that the firm's stockholders would themselves expect to earn a return on earnings that were distributed rather than retained and reinvested.
• C)No cost should be assigned to retained earnings because the firm does not have to pay anything to raise them.They are generated as cash flows by operating assets that were raised in the past; hence, they are "free."
• D)Suppose a firm has been losing money and thus is not paying taxes, and this situation is expected to persist into the foreseeable future.In this case, the firm's before-tax and after-tax costs of debt for purposes of calculating the WACC will both be equal to the interest rate on the firm's currently outstanding debt, provided that debt was issued during the past 5 years.
• E)If a firm has enough retained earnings to fund its capital budget for the coming year, then there is no need to estimate either a cost of equity or a WACC.

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Definitions:

Market Share Percentages

The proportion of sales in the total market sold by one company, expressed as a percentage.

Celler-Kefauver Act

A United States antitrust law passed in 1950, designed to prevent anti-competitive mergers and acquisitions that could create monopolies or reduce competition.

Clayton Act

Passed by Congress in 1914 to strengthen the Sherman Act and clarify the rule of reason, the act outlawed specific monopolistic behaviors such as tying contracts, price discrimination, and unlimited mergers.

HHI

Herfindahl-Hirschman Index (HHI) is a measure of market concentration, calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers.