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:

Standard Deviation

A statistical measure of the dispersion or variability of a set of data points around their mean.

Mean Deviation

The average deviation for all scores from the mean of a distribution, calculated as the sum of the absolute value of the scores’ deviations from the mean divided by the number of scores.

Standard Deviation

Standard deviation is a measure of the dispersion or spread of a set of data points relative to its mean, indicating how spread out the data points are.

Mean

The arithmetic average of a set of numbers, calculated by adding them together and dividing by the number of values.