Which of the Following Statements Is CORRECT

question 79

Multiple Choice

Which of the following statements is CORRECT?

• A) The component cost of preferred stock is expressed as rp(1 - T). This follows because preferred stock dividends are treated as fixed charges, and as such they can be deducted by the issuer for tax purposes.
• B) A cost should be assigned to retained earnings due to the opportunity cost principle, which refers to the fact that the firm's stockholders would themselves expect to earn a return on earnings that were paid out rather than retained and reinvested.
• C) No cost should be assigned to retained earnings because the firm does not have to pay anything to raise them. They are generated as cash flows by operating assets that were raised in the past, hence they are "free."
• D) Suppose a firm has been losing money and thus is not paying taxes, and this situation is expected to persist into the foreseeable future. In this case, the firm's before-tax and after-tax costs of debt for purposes of calculating the WACC will both be equal to the interest rate on the firm's currently outstanding debt, provided that debt was issued during the past 5 years.
• E) If a firm has enough retained earnings to fund its capital budget for the coming year, then there is no need to estimate either a cost of equity or a WACC.

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Definitions:

Monthly Profit

The total revenue of a business minus its expenses, costs, and taxes calculated on a monthly basis.

Total Optimal Profit

The maximum possible profit that can be achieved in a given scenario, taking into account all constraints and limitations.

Solver

A software tool used in optimization that finds the optimal solution to a problem by varying the values of variables within constraint boundaries.

Monthly Profit

The total revenue generated by a business minus its expenses, taxes, and costs, calculated on a monthly basis.