Which of the Following Statements Is MOST Correct

question 127

Multiple Choice

Which of the following statements is MOST correct?

• A) Because the cost of debt is lower than the cost of equity, value-maximizing firms maintain debt ratios of close to 100%.
• B) Corporations that are 100% equity financed will have a much lower weighted average cost of capital because the lack of debt lowers their risk of bankruptcy.
• C) The source of capital with the lowest after-tax cost is preferred stock, because it is a hybrid security, part debt and part equity.
• D) The cost of a particular source of capital is equal to the investor's required rate of return after adjusting for the effects of both flotation costs and corporate taxes.

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Definitions:

Test-Statistic

A quantity derived from sample data used in a hypothesis test to make a decision about the population parameter.

Right Tailed

Pertaining to a type of hypothesis test where the area of interest is in the right tail of the distribution, typically testing for values greater than a certain number.

Test-Statistic

A value calculated from sample data during hypothesis testing used to determine whether to reject the null hypothesis.

P-Value

the probability of obtaining test results at least as extreme as the ones observed during the study, assuming that the null hypothesis is correct.