Which of the Following Statements Is CORRECT

question 88

Multiple Choice

Which of the following statements is CORRECT?

• A) The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project,i.e. ,it is the after-tax cost of debt if debt is to be used to finance the project or the cost of equity if the project will be financed with equity.
• B) The after-tax cost of debt that should be used as the component cost when calculating the WACC is the average after-tax cost of all the firm's outstanding debt.
• C) Suppose some of a publicly-traded firm's stockholders are not diversified;they hold only the one firm's stock.In this case,the CAPM approach will result in an estimated cost of equity that is too low in the sense that if it is used in capital budgeting,projects will be accepted that will reduce the firm's intrinsic value.
• D) The cost of equity is generally harder to measure than the cost of debt because there is no stated,contractual cost number on which to base the cost of equity.
• E) The bond-yield-plus-risk-premium approach is the most sophisticated and objective method for estimating a firm's cost of equity capital.

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Definitions:

Insiders

Individuals within an organization who have access to confidential and proprietary information not available to the public, such as executives and key employees.

Reporting Issuer

A corporation that has issued securities to the public and is obligated to disclose periodic financial information to regulatory agencies and shareholders.

Outstanding Voting Rights

The rights to vote that are held by shareholders of a company, which have not been exercised yet.

Self-Regulating Organizations

Entities that operate independently to enforce rules and standards within a particular industry or profession without direct government oversight.