Which of the Following Statements Is CORRECT

question 86

Multiple Choice

Which of the following statements is CORRECT?

• A) When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.
• B) When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation.
• C) Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM.
• D) If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough retained earnings to take care of its equity financing and hence must issue new stock.

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Definitions:

Industrial Revolution

A period of major industrialization from the late 18th to early 19th century that transformed mainly agricultural societies into industrialized and urban ones.

Company Towns

Historically, communities where practically all stores and housing are owned by the one company that is also the main employer.

Gilbreths

Refers to Frank and Lillian Gilbreth, pioneers in the field of industrial engineering, known for their studies in time and motion, and efforts to improve workplace efficiency.

Self-Esteem

The perception of one's own value or worth, which can impact behavior, motivation, and emotional well-being.