Which of the Following Statements Is CORRECT

question 70

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 (re) could possibly be lower than the cost of retained earnings (rs) 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 rp(1 - T), because preferred stock dividends are treated as fixed charges, similar to the treatment of interest on debt.

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Definitions:

Comparative Advantage

The capacity of an entity to generate a product or service with a smaller opportunity cost than others.

Absolute Advantage

The capacity of an entity to manufacture a product or provide a service more effectively than its rivals, by utilizing fewer resources.

Comparative Advantage

A principle in economics that asserts a country's ability to produce a good at a lower opportunity cost compared to another country, fostering global trade efficiency.

Opportunity Cost

The cost of forgoing the next best alternative when making a decision, a fundamental concept in economics that emphasizes the potential benefits that are lost when choosing one option over another.