Which of the Following Statements Is CORRECT

question 57

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 distributed 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:

Limbic System

A complex system of nerves and networks in the brain, involved with instinct and mood, controlling basic emotions, and drives.

Cerebellum

A key part of the brain responsible for coordinating voluntary movements, balance, and muscle tone.

Parietal Lobe

The region of the brain located between the frontal and occipital lobes, responsible for processing sensory information regarding the location of parts of the body as well as visual information.

Pain Signals

Neurological transmissions indicating injury or potential harm to the body, captured and relayed by sensory neurons.