Which of the Following Statements Is CORRECT

question 20

Multiple Choice

Which of the following statements is CORRECT?

• A) When calculating the cost of debt,a company needs to adjust for taxes,because interest payments are deductible by the paying corporation.
• B) When calculating the cost of preferred stock,companies must adjust for taxes,because dividends paid on preferred stock are deductible by the paying corporation.
• C) Because of tax effects,an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM.
• D) If a company's beta increases,this will increase the cost of equity used to calculate the WACC,but only if the company does not have enough retained earnings to take care of its equity financing and hence must issue new stock.
• E) Higher flotation costs reduce investors' expected returns,and that leads to a reduction in a company's WACC.

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Definitions:

Pott Fracture

A type of fracture affecting the fibula near the ankle, often involving ligament damage.

Spiral

A curve which emanates from a center point, getting progressively farther away as it revolves around the point.

Transverse

Positioned or lying across; situated crosswise.

Arthrography

A diagnostic imaging technique used to visualize the inside of a joint using X-ray after injecting a contrast medium.