Which of the Following Statements Is CORRECT

question 8

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.

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Definitions:

Guide Government Action

Principles, frameworks, or policies that direct or influence the decisions and activities of a government.

Better Society

An ideal or aspirational vision of a community that offers improved conditions and opportunities for its members.

Utilitarian Theory

An ethical theory that posits the best action is the one that maximizes utility, typically defined as that which produces the greatest well-being of the greatest number of people.

Consequentialist Theory

A normative ethical theory that judges actions based on their consequences or outcomes.