Which of the Following Statements About a Not-For-Profit Firm's Cost

question 10

Multiple Choice

Which of the following statements about a not-for-profit firm's cost of capital estimate is most correct?

• A) The capital structure weights for a not-for-profit firm are set at 50/50, because such firms can raise $1 of debt financing for each dollar of retained earnings.
• B) The cost of tax-exempt debt issued by not-for-profit firms is increased ("grossed up") by 1 - T in the WACC estimate to reflect the fact that such firms do not pay taxes.
• C) Equity (fund) capital has a cost that is roughly equivalent to the cost of retained earnings to similar investor-owned companies.
• D) Not-for-profit firms have a zero cost of capital.
• E) Since a not-for-profit firm has no shareholders, its WACC estimate does not include a cost of equity (fund capital) estimate.

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Definitions:

Tendered Performance

The act of offering or presenting for acceptance a performance of obligations under a contract.

Minor Contractual Term

A less important condition or provision of a contract that does not go to the heart of the agreement.

Anticipatory Breach

A situation where one party indicates by words or actions that they will not fulfill their contractual obligations.

Performance Risk

The possibility of a party failing to fulfill their obligations under a contract, leading to performance failure.