Which of the Following Statements Is CORRECT

question 4

Multiple Choice

Which of the following statements is CORRECT?

• A) The WACC is calculated using before-tax costs for all components.
• B) The after-tax cost of debt usually exceeds the after-tax cost of equity.
• C) For a given firm,the after-tax cost of debt is always more expensive than the after-tax cost of non-convertible preferred stock.
• D) Retained earnings that were generated in the past and are reported on the firm's balance sheet are available to finance the firm's capital budget during the coming year.
• E) The WACC that should be used in capital budgeting is the firm's marginal,after-tax cost of capital.

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Definitions:

Debt

Debt refers to money borrowed by one party from another, under the condition that it is to be repaid, usually with interest.

Externality

An economic term referring to a cost or benefit incurred or received by a third party who has no control over how that cost or benefit was created.

Capital Budgeting

The process of evaluating and selecting long-term investments that are in line with a company's goal of maximizing shareholder value.

Project Cash Flow

The net amount of cash and cash-equivalents being transferred into and out of a project, reflecting its operational activity and financial health.