Which of the Following Statements Is CORRECT

question 26

Multiple Choice

Which of the following statements is CORRECT?

• A) In the WACC calculation,we must adjust the cost of preferred stock (the market yield)to reflect the fact that 70% of the dividends received by corporate investors are excluded from their taxable income.
• B) We should use historical measures of the component costs from prior financings that are still outstanding when estimating a company's WACC for capital budgeting purposes.
• C) The cost of new equity (r_e)could possibly be lower than the cost of retained earnings (r_s)if the market risk premium,risk-free rate,and the company's beta all decline by a sufficiently large amount.
• D) Its cost of retained earnings is the rate of return stockholders require on a firm's common stock.
• E) The component cost of preferred stock is expressed as r_p(1 - T),because preferred stock dividends are treated as fixed charges,similar to the treatment of interest on debt.

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