Which of the Following Statements Is CORRECT

question 18

Multiple Choice

Which of the following statements is CORRECT?

• A) When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation.
• B) 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.
• C) 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 reinvested earnings to take care of its equity financing and hence must issue new stock.
• D) Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC.
• E) When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.

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Definitions:

Exploration

The act of searching or traveling for the purpose of discovery, usually in unfamiliar territories.

Commitment

The state or quality of being dedicated to a cause, activity, or relationship.

Specific Job

A particular employment position defined by a unique set of duties and responsibilities.

Labor Force Discontinuity

Interruptions or gaps in a person's work history, often due to personal reasons, unemployment, or transitions between jobs.