Which of the Following Statements Is CORRECT? Assume a Company's

question 17

Multiple Choice

Which of the following statements is CORRECT? Assume a company's target capital structure is 50% debt and 50% common equity.

• A) The WACC is calculated on a before-tax basis.
• B) The WACC exceeds the cost of equity.
• C) The cost of equity is always equal to or greater than the cost of debt.
• D) The cost of reinvested earnings typically exceeds the cost of new common stock.
• E) The interest rate used to calculate the WACC is the average after-tax cost of all the company's outstanding debt as shown on its balance sheet.

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Definitions:

Cash Dividend

A distribution of a company's earnings to shareholders in the form of cash.

Voting Common Stock

Shares that give the shareholder voting rights in corporate decisions, typically involving one vote per share owned.

Net Unrealized Gains/Losses

Represents the difference between the current market value of held investments and their original purchase prices, not yet realized through sales.

Equity Method

An accounting technique used to record investments in which the investor has significant influence over the investee but does not have full control.