For a Company Whose Target Capital Structure Calls for 50

question 10

Multiple Choice

For a company whose target capital structure calls for 50% debt and 50% common equity, which of the following statements is correct?

• A) The cost of equity is always equal to or greater than the cost of debt.
• B) The WACC is calculated on a before-tax basis.
• C) The WACC exceeds the cost of equity.
• D) The cost of retained earnings typically exceeds the cost of new common stock.

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Definitions:

Substitution Effect

The alteration in buying habits caused by shifts in relative prices, prompting consumers to swap out higher-priced goods for more affordable options.

Output Effect

The change in total revenue resulting from selling more units of a product, potentially influenced by changes in price or quantity produced.

Substitute Resource

Alternative resources or inputs that can be used in place of another in the production process to produce a similar type of output.

Productivity

The efficiency with which input resources are converted into outputs, often measured as the ratio of output to input in a given time period.