Which of the Following Statements Is Correct

question 13

Multiple Choice

Which of the following statements is correct?

• A) The WACC should include only after-tax component costs.Therefore,the required rates of return (or "market rates")on debt,preferred,and common equity (r_d,r_ps,and r_{s or e})must be adjusted to an after-tax basis before they are used in the WACC equation.
• B) The cost of retained earnings is generally higher than the cost of new common stock.
• C) Preferred stock is riskier to investors than is debt.Therefore,if someone told you that the market rates showed r_d > r_ps for a given company,that person must have made a mistake.
• D) When the MCC schedule is developed,the first break point always occurs as a result of using up retained earnings.
• E) If a company with a debt-to-assets ratio of 50 percent were suddenly exempted from all future income taxes,then,all other things held constant,this would cause its WACC to increase.

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Definitions:

Payments

The transfer of money, or its equivalent, from one party to another as a fulfillment of an obligation or for the purchase of goods or services.

Yearly

Relating to or happening every year; annual.

Borrow

The act of receiving something with the intention of returning it or its equivalent to the owner at a later date.

Preferred Stock

Preferred stock is a type of equity that typically gives its holders preference over common stockholders in terms of dividends and claims on assets in the event of liquidation, but usually does not carry voting rights.