A Company Has a Capital Structure Which Consists of 50

question 32

Multiple Choice

A company has a capital structure which consists of 50 percent debt and 50 percent equity. Which of the following statements is most correct?

• A) The cost of equity financing is greater than or equal to the cost of debt financing.
• B) The WACC exceeds the cost of equity financing.
• C) The WACC is calculated on a before-tax basis.
• D) The WACC represents the cost of capital based on historical averages. In that sense, it does not represent the marginal cost of capital.
• E) The cost of retained earnings exceeds the cost of issuing new common stock.

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Definitions:

Strategic Opportunism

The ability to remain flexible and seize new opportunities while still maintaining a focus on long-term strategic goals.

Anchoring and Adjustment Bias

A cognitive bias where an individual relies too heavily on an initial piece of information (anchor) when making decisions, even if it is unrelated or irrelevant.

Availability Bias

A cognitive bias where people overestimate the importance of information that is readily available to them.

Confirmation Error

A cognitive bias where individuals favor information that confirms their existing beliefs or hypotheses.