Which of the Following Statements Is Most Correct

question 57

Multiple Choice

Which of the following statements is most correct?

• A) One purpose of calculating the WACC is to have a singular cost of capital measure that can be applied to evaluate all of the firm's projects,including those of greater than and lesser than average risks.
• B) A firm facing a steep demand curve (that is,high flotation costs)for new equity would likely also face,at some point,a steeply upward sloping WACC curve.
• C) A breakpoint is based on the dollar value used of a specific type of capital,and occurs at the point where the cost of that capital type increases.Thus,if a firm has $100,000 in earnings,and stockholders want $50,000 of those earnings paid as dividends,then retained earnings will have two breakpoints.
• D) Answers a and b are both correct.
• E) All of the above are false.

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Definitions:

Price of Capital

The cost of using capital goods, represented by interest rates, lease payments, or other measures of the cost of borrowing or using capital.

Marginal Revenue Product

The additional revenue generated from employing one additional unit of a resource, such as labor or capital.

Complementary Resource

A resource or product that enhances or is necessary for the use of another resource or product, such as printers for computers.

Substitution Effect

The alteration in buying habits caused by shifts in relative prices, prompting consumers to swap out higher-priced goods for more affordable options.