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.

---

Definitions:

Fuel-efficient Cars

Automobiles designed to use less fuel for the same distance traveled compared to standard vehicles, thus reducing operational costs and environmental impact.

Public Transportation

A system of vehicles such as buses and trains that operate at regular times on fixed routes and are used by the public.

In-state Students

Students enrolled in a public university or college within the same state in which they are residents, often eligible for lower tuition rates.

State Universities

Public universities that are primarily funded by a state government, offering higher education services to residents often at a reduced cost.