Which of the Following Statements Is CORRECT

question 3

Multiple Choice

Which of the following statements is CORRECT?

• A) We should use historical measures of the component costs from prior financings that are still outstanding when estimating a company's WACC for capital budgeting purposes.
• B) The cost of new equity (r_e) could possibly be lower than the cost of reinvested earnings (r_s) if the market risk premium, risk-free rate, and the company's beta all decline by a sufficiently large amount.
• C) A company must try to adjust its current actual market value weights toward its target weights.
• D) The component cost of preferred stock is expressed as r_p(1 − T), because preferred stock dividends are treated as fixed charges, similar to the treatment of interest on debt.
• E) In the WACC calculation, we must adjust the cost of preferred stock (the market yield) to reflect the fact that 50% of the dividends received by corporate investors are excluded from their taxable income.

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Definitions:

Output

The total amount of goods or services produced by a company or country.

Input

Resources used in the production process, including labor, raw materials, and capital.

Marginal Revenue Product

The additional revenue generated from employing one more unit of a factor of production, such as labor.

Productivity

Productivity measures the efficiency of production in terms of the amount of goods and services produced from a given amount of inputs, such as labor and capital, within a specific period.