Which of the Following Statements Is CORRECT

question 44

Multiple Choice

Which of the following statements is CORRECT?

• A) The bond-yield-plus-risk-premium approach to estimating the cost of common equity involves adding a risk premium to the interest rate on the company's own long-term bonds. The size of the risk premium for bonds with different ratings is published daily in The Wall Street Journal.
• B) The WACC is calculated using a before-tax cost for debt that is equal to the interest rate that must be paid on new debt, along with the after-tax costs for common stock and for preferred stock if it is used.
• C) An increase in the risk-free rate is likely to reduce the marginal costs of both debt and equity.
• D) The relevant WACC can change depending on the amount of funds a firm raises during a given year. Moreover, the WACC at each level of funds raised is a weighted average of the marginal costs of each capital component, with the weights based on the firm's target capital structure.
• E) Beta measures market risk, which is generally the most relevant risk measure for a publicly-owned firm that seeks to maximize its intrinsic value. However, this is not true unless all of the firm's stockholders are well diversified.

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Definitions:

Merit Pay

A raise in salary based on an employee's performance, rewarding those who meet or exceed specified work standards.

Criticism

The act of expressing disapproval of someone or something based on perceived faults or mistakes.

Merit Pay

A pay increase given to employees based on their performance, as an incentive to encourage higher productivity and commitment.

Incentive Pay

A form of compensation designed to reward employees for achieving specific goals or exceptional performance.