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:

Variables

Elements, features, or factors that are likely to vary or change within the context of a study or an experiment.

Dual-route Theories

Theoretical approaches suggesting two separate pathways or mechanisms in the brain for processing information, often used in the context of reading and language comprehension.

External Theories

Concepts or explanations developed to understand phenomena outside an individual or organization, often involving the broader environment or society.

Consequences of Behavior

The outcomes or impacts that result from actions of an individual or group.