Which of the Following Statements Is CORRECT

question 88

Multiple Choice

Which of the following statements is CORRECT?

• A) The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project,i.e. ,it is the after-tax cost of debt if debt is to be used to finance the project or the cost of equity if the project will be financed with equity.
• B) The after-tax cost of debt that should be used as the component cost when calculating the WACC is the average after-tax cost of all the firm's outstanding debt.
• C) Suppose some of a publicly-traded firm's stockholders are not diversified;they hold only the one firm's stock.In this case,the CAPM approach will result in an estimated cost of equity that is too low in the sense that if it is used in capital budgeting,projects will be accepted that will reduce the firm's intrinsic value.
• D) The cost of equity is generally harder to measure than the cost of debt because there is no stated,contractual cost number on which to base the cost of equity.
• E) The bond-yield-plus-risk-premium approach is the most sophisticated and objective method for estimating a firm's cost of equity capital.

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Definitions:

First-In, First-Out

An inventory valuation method where the costs of the oldest inventory items are assigned to cost of goods sold first, leaving the most recently purchased items in inventory.

Conversion

The process of changing or causing something to change from one form to another, often used in the context of converting raw materials into finished goods.

Department A

A designated section within an organization or factory, often referred to by its functional area or product line, involved in specific operations.

Weighted-Average Method

An inventory costing method that assigns a weighted average cost to each unit of inventory, used to calculate cost of goods sold and ending inventory.