Which of the Following Statements Concerning the Effect of Taxes

question 44

Multiple Choice

Which of the following statements concerning the effect of taxes on a firm's cost of capital is correct?

• A)All else equal, an increase in the corporate tax rate will result in a decrease in the firm's weighted average cost of capital.
• B)For a particular firm, the before-tax cost of debt is less than the after-tax cost of debt because the firm must pay taxes on the interest its bondholders receive.
• C)A firm's after-tax cost of debt is always greater than its cost of retained earnings.
• D)Because preferred stock dividends are tax deductible to the firm, its cost of preferred stock is greater than its before-tax cost of debt.
• E)All else equal, a firm's cost of retained earnings is less than its cost of new common equity because any earnings retained by the firm are not double taxed (i.e., taxed twice) like the dividends that are paid to new common stockholders.

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Definitions:

Bias-Free Language

Communication that avoids words or phrases that discriminate against specific groups or imply partiality.

Unfairly Stigmatize

To unjustly assign a mark of disgrace or infamy to an individual or group.

Diplomatic

Pertaining to the skillful management of relationships and negotiation between people or nations in a tactful and effective manner.

Passive Voice

A grammatical voice wherein the subject of the sentence is acted upon by the verb, often de-emphasizing the doer of the action.