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:

Rights To Net Assets

The entitlements that equity holders have to a company's assets after all liabilities have been settled.

Specific Assets And Liabilities

Items on a company's balance sheet that are clearly identified and quantified, including cash, inventory, debt, and equity.

Incorporated Business

A business entity that is legally recognized as separate from its owners, with its own rights and liabilities.

Proportionately Adjusted

Refers to the method of adjusting figures or data in financial statements to reflect the ownership interest accurately.