Which One of the Following Statements Is Correct Concerning the Weighted

question 267

Multiple Choice

Which one of the following statements is correct concerning the weighted average cost of capital (WACC) ?

• A) The pre-tax rate of return on the debt is the rate that is relevant to the computation of the WACC.
• B) When computing the WACC, the weight assigned to the preferred stock is equal to the coupon rate multiplied by the par value assigned to the preferred stock.
• C) A firm's WACC will decrease as their corporate tax rate decreases.
• D) The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book value per share.
• E) The weight of the debt can be based on the face value of the bond issue(s) outstanding multiplied by the quoted price(s) when expressed as a percentage of the face value.

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Definitions:

Price Ceiling

A government-imposed limit on how high a price is charged for a product, service, or commodity, intended to protect consumers from high prices.

Persistent Shortage

A situation where the demand for a good or service consistently exceeds its supply, over a significant period of time.

Deadweight Loss

The loss of economic efficiency when the equilibrium for a good or a service is not achieved or is not achievable.

Rent Control

A government policy or law that sets a maximum price landlords can charge for rent.