For a Company Whose Target Capital Structure Calls for 50

question 3

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

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Definitions:

After-Tax Income

The amount of net income left after all federal, state, and withholding taxes have been deducted from an individual's earnings.

Tax Liability

The total amount of taxes owed by an individual or a corporation to the tax authorities.

Negative Income Tax

A proposed system of social security that guarantees a minimum income to all, where those earning below a certain amount receive supplemental pay from the government instead of paying taxes.

Income Subsidy

An income subsidy is a government-provided financial assistance program intended to boost an individual's income to a level sufficient for meeting basic living standards.