Which of the Following Statements Is CORRECT

question 72

Multiple Choice

Which of the following statements is CORRECT?

• A) In the WACC calculation, we must adjust the cost of preferred stock (the market yield) to reflect the fact that 70% of the dividends received by corporate investors are excluded from their taxable income.
• B) We should use historical measures of the component costs from prior financings that are still outstanding when estimating a company's WACC for capital budgeting purposes.
• C) The cost of new equity (re) could possibly be lower than the cost of retained earnings (rs) if the market risk premium, risk-free rate, and the company's beta all decline by a sufficiently large amount.
• D) A firm's cost of retained earnings is the rate of return stockholders require on a firm's common stock.
• E) The component cost of preferred stock is expressed as rp(1 - T), because preferred stock dividends are treated as fixed charges, similar to the treatment of interest on debt.

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Definitions:

Pre-merger Market Values

The valuation of companies involved in a merger as determined before the merger takes place, often used to assess the financial health and assets of the entities.

Liabilities Acquisition

The process of obtaining new obligations or debts, often through purchases or other financial transactions.

Fair Consideration

In the context of contracts, it refers to something of value that is exchanged between parties, which is considered reasonable and equitable.

Shares Issue

The process by which a company distributes new shares of stock to investors or the public for the first time.