For a Company Whose Target Capital Structure Calls for 50

question 3

Multiple Choice

For a company whose target capital structure calls for 50% debt and 50% common equity,which of the following statements is CORRECT?

• A) The interest rate used to calculate the WACC is the average after-tax cost of all the company's outstanding debt as shown on its balance sheet.
• B) The WACC is calculated on a before-tax basis.
• C) The WACC exceeds the cost of equity.
• D) The cost of equity is always equal to or greater than the cost of debt.
• E) The cost of retained earnings typically exceeds the cost of new common stock.

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Identify the conditions that create competitive (non-zero-sum) and cooperative (zero-sum) negotiation scenarios.

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