Which of the Following Statements Is Correct

question 4

Multiple Choice

Which of the following statements is correct?

• A) Because we often need to make comparisons among firms that are in different income tax brackets, it is best to calculate the WACC on a before-tax basis.
• B) If a firm has been suffering accounting losses and is expected to continue suffering such losses (and therefore its tax rate is zero), it is possible that its after-tax component cost of preference shares as used to calculate the WACC will be less than its after-tax component cost of debt.
• C) Due to the way the MCC is constructed, the first break point in the MCC schedule must be associated with using up all available retained earnings and having to issue ordinary shares.
• D) Normally, the cost of external equity raised by issuing new ordinary shares is above the cost of retained earnings.Moreover, the higher the growth rate relative to the dividend yield, the more the cost of external equity will exceed the cost of retained earnings.
• E) None of the above is a correct statement.

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Definitions:

Fresh Eyes

The perspective gained by reviewing a document or problem after a break, often leading to new insights or spotting overlooked errors.

Draft

a preliminary version of a document or plan that is subject to revisions and improvements.

PAIBOC

An acronym for Purpose, Audience, Information, Benefits, Objections, and Context, a framework used to guide effective business communication.

Purpose Statements

Declarations that outline the objectives or goals of an entity, often guiding actions and decision-making processes.