Which of the Following Statements Is CORRECT

question 23

Multiple Choice

Which of the following statements is CORRECT?

• A) 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.
• B) The tax-adjusted cost of debt is always greater than the interest rate on debt,provided the company does in fact pay taxes.
• C) 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.
• D) Because no flotation costs are required to obtain capital as retained earnings,the cost of retained earnings is generally lower than the after-tax cost of debt.
• E) Higher flotation costs tend to reduce the cost of equity capital.

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Definitions:

Finance Charge

A fee representing the cost of credit or the cost of borrowing on accounts, including interest and other charges.

Finance Charge

The total cost of borrowing, including interest, fees, and any other charges associated with the extension of credit.

Sale of Receivables

The process of selling a company's accounts receivable to a third party to improve cash flow and reduce risk.

Trade Receivables

Sums due to a business from its customers for goods or services provided on credit.