Which of the Following Statements Is Correct

question 100

Multiple Choice

Which of the following statements is correct?

• A) Capital components are the types of capital used by firms to raise money.All capital comes from one of three components: long-term debt,preferred stock,and equity.
• B) Preferred stock does not involve any adjustment for flotation cost since the dividend and price are fixed.
• C) The cost of debt used in calculating the WACC is an average of the after-tax cost of new debt and of outstanding debt.
• D) The opportunity cost principle implies that if the firm cannot invest retained earnings and earn at least r_s,it should pay these funds to its stockholders and let them invest directly in other assets that do provide this return.
• E) The cost of new common equity includes an adjustment for flotation costs that is expressed as a fixed percentage of the current stock price.The flotation percentage is determined jointly by the current price of the firm's stock and its growth rate.

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Definitions:

Price-taker Firm

A company that has no control over the market price and must accept the prevailing market price for its products.

Short Run

A period in economics during which some factors of production are fixed, limiting the ability to fully adjust to market changes.

Elasticity of Market Supply

The degree to which the quantity supplied of a good changes in response to a change in price.

Output Expansion

The increase in the production of goods and services in an economy or by a firm, often as a result of increased demand or improved production capabilities.