Which of the Following Statements Is CORRECT

question 29

Multiple Choice

Which of the following statements is CORRECT?

• A) A cost should be assigned to reinvested earnings due to the opportunity cost principle, which refers to the fact that the firm's stockholders would themselves expect to earn a return on earnings that were distributed rather than retained and reinvested.
• B) No cost should be assigned to reinvested earnings because the firm does not have to pay anything to raise them.They are generated as cash flows by operating assets that were raised in the past; hence, they are "free."
• C) Suppose a firm has been losing money and thus is not paying taxes, and this situation is expected to persist into the foreseeable future.In this case, the firm's before-tax and after-tax costs of debt for purposes of calculating the WACC will both be equal to the interest rate on the firm's currently outstanding debt, provided that debt was issued during the past 5 years.
• D) If a firm has enough reinvested earnings to fund its capital budget for the coming year, then there is no need to estimate either a cost of equity or a WACC.
• E) The component cost of preferred stock is expressed as r_p(1 − T).This follows because preferred stock dividends are treated as fixed charges, and as such they can be deducted by the issuer for tax purposes.

Understand the effects of price setting on consumer demand and market competition.

Analyze the impact of cost considerations on price setting.

Understand the concept of price elasticity and its calculation.

Recognize the role of psychological pricing in consumer perception.

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Definitions:

Paid

Refers to the status of a financial obligation that has been fulfilled or settled.

Constant Annual Dividend

This refers to dividends that are paid out to shareholders at a constant rate each year, without fluctuation.

Market Price

The rate at which services or assets are being marketed currently.

Cumulative Voting

Cumulative voting is a voting system that allows shareholders to allocate their votes for the board of directors in a manner they prefer, often used to strengthen the voting power of minority shareholders.