Which of the Following Statements Is CORRECT

question 65

Multiple Choice

Which of the following statements is CORRECT?

• A) The tax-adjusted cost of debt is always greater than the interest rate on debt, provided the company does in fact pay taxes.
• B) If a company assigns the same cost of capital to all of its projects regardless of each project's risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject.
• C) Because no flotation costs are required to obtain capital as reinvested earnings, the cost of reinvested earnings is generally lower than the after-tax cost of debt.
• D) Higher flotation costs tend to reduce the cost of equity capital.
• E) Since debt capital can cause a company to go bankrupt but equity capital cannot, debt is riskier than equity, and thus the after-tax cost of debt is always greater than the cost of equity.

---

Definitions:

Seasonal Inventory

Inventory that is purchased or produced in anticipation of season-based demand increases, such as holiday merchandise.

Strategic Fit

The alignment between an organization's strategies, resources, and capabilities with its external environment to achieve long-term objectives.

Responsiveness

The ability of a company or system to quickly and effectively respond to changes, customer demands, or market conditions.

Efficiency

Relates to achieving maximum productivity with minimum wasted effort or expense, often critical in business processes and operations.