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.

Analyze the role of product differentiation in monopolistic competition, including the basis for differentiation and its impact on consumer choice.

Understand the concept of elasticity of demand for monopolistically competitive firms and its implications.

Recognize the impact of advertising and brand differentiation in monopolistically competitive markets.

Comprehend the conditions under which price discrimination occurs in monopolistic competition.

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Definitions:

Herfindahl Index

An economic measure of market concentration used to determine the level of competition within an industry, calculated by summing the squares of the market shares of all firms within the market.

Patentable

Refers to inventions that fulfill the criteria of being new, non-obvious, and useful, qualifying them for patent protection.

Expected-rate-of-return

The profit or loss one anticipates on an investment relative to the amount of money invested.

Optimal R&D

The ideal level of spending on research and development that maximizes an organization's returns or benefits.