Which of the Following Statements Is CORRECT

question 79

Multiple Choice

Which of the following statements is CORRECT?

• A) The component cost of preferred stock is expressed as rp(1 - T). This follows because preferred stock dividends are treated as fixed charges, and as such they can be deducted by the issuer for tax purposes.
• B) A cost should be assigned to retained earnings due to the opportunity cost principle, which refers to the fact that the firm's stockholders would themselves expect to earn a return on earnings that were paid out rather than retained and reinvested.
• C) No cost should be assigned to retained earnings because the firm does not have to pay anything to raise them. They are generated as cash flows by operating assets that were raised in the past, hence they are "free."
• D) Suppose a firm has been losing money and thus is not paying taxes, and this situation is expected to persist into the foreseeable future. In this case, the firm's before-tax and after-tax costs of debt for purposes of calculating the WACC will both be equal to the interest rate on the firm's currently outstanding debt, provided that debt was issued during the past 5 years.
• E) If a firm has enough retained earnings to fund its capital budget for the coming year, then there is no need to estimate either a cost of equity or a WACC.

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Definitions:

Criminal Penalties

Criminal penalties refer to the sanctions imposed by a court following a conviction for a criminal offense, such as fines, probation, or imprisonment.

EEOC

Equal Employment Opportunity Commission, a federal agency responsible for enforcing laws against workplace discrimination.

Affirmative Action

is a policy or a set of policies designed to promote the opportunities of defined minority groups within a society to give them equal access to that of the majority.

Workforce Imbalance

A situation where there is a discrepancy in the supply and demand of workers, often referring to skills, gender, or demographic disparities.